Employee achievement awards are taxable unless they meet special rules for awards of tangible personal property (such as a watch, television, or golf clubs) given to you in recognition of length of service or safety achievement. Cash awards, gift certificates, and similar items are taxable.
As a general rule, if your employer is allowed to deduct the cost of a tangible personal property award, you are not taxed. Your employer’s deduction limit, and therefore the excludable limit for you, is $400 for awards from nonqualified plans and $1,600 for awards from qualified plans. If your employer’s deduction is less than the item’s cost, you are taxed on the greater of: (1) the difference between the cost and your employer’s deduction, or (2) the difference between the item’s fair market value and your employer’s deduction. Your employer must tell you beforehand if the award qualifies for full or partial tax-free treatment.
An award will not be treated as a tax-free safety achievement award if employee safety achievement awards during the year have already been granted to more than 10% of eligible employees. An award given to an ineligible employee, such as a manager, administrator, clerical employee, or other professional employee, for safety achievement does not qualify for tax-free treatment. If the value of an achievement award item is disproportionately high compared to the employer’s cost, the IRS may conclude that the award is disguised compensation and the entire value would be taxable.
Tax-free treatment also does not apply when you receive an award for length of service during the first five years of employment or when you previously received an award for length of service during the last five years.
Small benefits given to employees that would be administratively impractical to tax are considered tax-free de minimis (minor) fringe benefits. Some examples are:
If your employer gives you a cell phone for substantial business reasons, the value of the cell phone is a tax-free working condition fringe benefit. In such a case, your personal use of the phone is tax free as a de minimis benefit.
The value of meals provided to employees on workdays at a subsidized eating facility is a tax-free de minimis fringe benefit if the facility is located on or near the business premises and the annual revenue from meal charges equals or exceeds the facility’s direct operating costs. Highly compensated employees or owners with special access to executive dining rooms may not exclude the value of their meals as a de minimis fringe benefit. However, the meals may be tax free if they must be taken on company premises for business reasons.
If employees are asked to work outside their normal working hours and due to unsafe conditions their employer provides transportation such as taxi fare, the first $1.50 per one-way commute is taxable but the excess over $1.50 is a tax-free de minimis benefit. This exclusion is not available to certain highly compensated employees and officers, corporate directors, or owners who own 1% or more of the company. These rules can apply to day-shift employees who work overtime as well as night-shift employees working regular hours.
The use of a company car is tax free to the extent you use the car for business. If you use the car for personal driving, your company has the responsibility of calculating taxable income, which generally is based on IRS tables that specify the annual lease value of various priced cars. You are also required to keep for your employer a mileage log or similar record to substantiate your business use. Your employer should tell you what types of records are required.
Regardless of personal use, you are not subject to tax for a company vehicle that the IRS considers to be of limited personal value. Some example of these types of vehicles are: ambulances, flatbed trucks, dump trucks, garbage trucks, delivery trucks, tractors, and forklifts. Also not taxable is personal use of school buses, passenger buses with more than 20 seats, and moving vans where personal use is restricted. Exclusions are also allowed for commuting use of a clearly marked police, fire, or public safety officer vehicle by officers required to be on call at all times, and for officially authorized uses of unmarked vehicles by law enforcement officers.
The value of a demonstration car used by a full-time auto salesperson is tax free if the use of the car facilitates job performance and if there are substantial personal-use restrictions, including a restriction on use by family members and for vacation trips. Mileage outside of normal working hours must be limited and personal driving must be restricted to a 75-mile radius around the dealer’s sales office.
Social Security and Medicare taxes must be withheld for taxable company car benefits. No income tax withholding is required, but your employer may choose to withhold it. The taxable value of company car benefits is reported on Form W-2 in Box 14.
Your employer may provide you with transportation benefits that are tax free within certain limits. There are three categories of transportation benefits: (1) transit passes and commuter transportation, (2) parking, and (3) bicycle commuting. You may receive benefits from each category so long as the applicable monthly limit ($250 per month in 2015) is not exceeded. If the benefits exceed the monthly limit, the excess is treated as wages subject to income tax, Social Security, and Medicare tax.
Transportation benefits may be provided through a salary-reduction arrangement. An irrevocable salary-reduction election may be made for a monthly amount of benefits. The salary reduction for any month may not exceed the total limit. Unused salary reductions may be carried over to later months and from year to year. However, if you leave the company before using the carryover, the unused amount is forfeited and no refund is given.
Transit Passes and Commuter Transportation
The combined value of transit passes and commuter transportation is to $130 per month in 2015. If the value of benefits for any month does not equal the exclusion limit, the unused amount is lost and may not be carried over to other months.
Qualifying transit passes include tokens, fare cards, or vouchers for mass transit or private transportation businesses using highway vehicles seating at least six passengers. Qualifying van or bus pool vehicles must seat at least six passengers and be used at least 80% of the time for employee commuting; on average, the number of employees must be at least half the seating capacity.
The exclusion applies only to regular employees. For partners, more than 2% S corporation shareholders, and independent contractors who are provided transit passes, the IRS allows up to $ 21 per month as a tax-free de minimis benefit. If the monthly value exceeds $21, the full value is taxable and not just the excess over $21.
For regular employees, the value of employer-provided parking spots or subsidized parking is tax free in 2015 up to a limit of $ 250 per month. Parking must be on or near the employer’s premises, at a mass transit facility such as a train station or car-pooling center. The value of parking benefits exceeding $ 250 per month is taxable in 2015.
Parking benefits are to be valued according to the regular commercial price for parking at the same or nearby locations. For example, if an employer in a rural or suburban location provides free parking for employees and there are no commercial parking lots in the area, the employee parking is tax-free. Where free parking is available to both business customers and employees, the employee parking is considered to have “zero” value unless the employee has a reserved parking space that is closer to the business entrance than the spaces allotted to customers.
If the value of the right of access to a parking space for a month in 2015 exceeds $250, an employee will be taxed on the excess even if he or she actually uses the space for only a few days during the month. If the employee pays a reduced monthly price for parking in 2015, there is a taxable benefit for that month only if the price paid plus the $ 250 exclusion is less than the value of the parking. Commuter parking benefits for self-employed partners, independent contractors, or more-than-2% S corporation shareholders do not qualify for the $250 exclusion.
Reimbursements for the cost of a bicycle used for commuting, and for storing, repairing and improving the bicycle, are tax free up to $20 per month in 2015. The $20 monthly exclusion is allowed only for months in which the employee (1) regularly uses the bicycle for a substantial portion of the commute from home to the place of employment, and (2) does not receive either transit pass benefits or parking benefits. An employee who bicycles from home to a train or bus station and continues his or her commute from there cannot receive the bicycle benefit for any month for which they take advantage of the transit pass/ commuter vehicle benefit.
If your employer pays for job-related courses, the payment is tax free to you provided that the courses do not satisfy the employer’s minimum education standards and do not qualify you for a new profession.
Even if not job related, your employer’s payment for courses is tax free up to $5,250 in 2015, provided the assistance is under a qualifying plan that meets nondiscriminatory tests. Both Graduate and undergraduate courses qualify for the exclusion. The exclusion covers tuition, fees, books, equipment, and supplies that you cannot keep at the end of the course. Lodging, meals, and transportation are not covered by the exclusion. Sports or hobby-type courses qualify only if the courses are related to your business or are required as part of a degree program.
Employees and retired employees of educational institutions, their spouses, and their dependent children are not taxed on tuition reductions for undergraduate courses provided the reduction is not payment for teaching or other services. Officers and highly paid employees of the educational institution may claim the exclusion only if the institution’s plan does not discriminate on their behalf. The exclusion applies to tuition for undergraduate education at any educational institution, not only the employer’s school.
Graduate students who are teaching or research assistants at an educational institution are not taxed on tuition reductions for courses at that school if the tuition reduction is in addition to regular pay for the teaching or research. The graduate student exclusion for tuition reductions applies only to teaching and research assistants, and not to faculty or other staff members (or their spouses and dependents) who take graduate courses and also do research for or teach at the school.
Expenses related to adoption paid for or reimbursed by your employer under a written, nondiscriminatory plan are tax-free up to $13,400 in 2015. Employer-provided adoption assistance can be for any child under the age off 18 or an individual physically or mentally incapable of caring for themselves.
Tax-free expenses include: adoption fees, attorney fees, court costs, travel costs, and any other expenses directly related to the adoption. An exception: adoption expenses for your spouse’s child or the costs of hiring a surrogate mother are considered taxable income.
The entire $13,400 tax-free amount is available for the adoption of a “special needs” child even if the actual costs are less than $13,400. A “special needs” designation is made by the state if they determine adoption assistance is required due to special factors (child’s physical condition or ethnicity).
Expenses for a child who is a not a U.S. citizen or resident are only tax-free in the year the adoption is finalized. For example, if you start the adoption process towards the end of 2015 but it is not completed until the beginning of 2016 then all reimbursements made during 2015 must be included in taxable income.
Tax Form 8839 is for Qualified Adoption Expenses, where you will report your employer’s payments and figure out the tax-free and taxable portions. All reimbursements for adoption will be included in Box 12 of Form W-2 with Code “T”. This total includes any pre-tax contributions you made under a cafeteria plan.
The deduction for adoption expenses starts to “phase out” once modified adjusted gross income (MAGI) exceeds $201,010 in 2015. If MAGI is $241,010 or more in 2015 then the entire amount of employer-paid adoption assistance is considered taxable income.
The value of child and dependent care assistance provided by an employer under a written, nondiscriminatory plan is not taxable up to $5,000, or $2,500 for a married couple filing separate tax returns. The $5,000 / $2,500 limits also apply if a taxpayer makes pre-tax salary deferrals to a flexible spending account for child and dependent care expenses.
The tax-deductible amount for child and dependent care expenses provided by an employer cannot exceed your earned income (salaries and wages). For example, a taxpayer who earns $4,000 can only deduct $4,000 for child and dependent care expenses. If you are married and your spouse does not work (unless they are a full-time student) then the entire amount is considered taxable income.
The expenses must qualify for the child and dependent care credit in order to be excluded from your income. You must give your employer a record of the care provider’s name, address, and tax identification number (this information must also be provided to the IRS on your tax return).
The tax-free portion of child and dependent care expenses reduces the amount of expenses eligible for the child and dependent care credit. If you are claiming a credit for child and dependent care, the benefits must be reported on Part III of Form 2441. Part III of Form 2441 is where you determine the tax-free and taxable portions of the employer-provided child and dependent care benefits.
The total amount of child and dependent care benefits is shown in Box 10 of Form W-2. Any benefits over $5,000 will also be included in Box 1 of Form W-2 as taxable wages, Box 3 of Form W-2 as Social Security wages, and Box 5 of Form W-2 as Medicare wages.
Employer payments of premiums on group-term life insurance policies of up to $50,000 are not taxable. You are only taxed on the cost of premiums for coverage that exceeds $50,000. If any amount of life insurance premiums is taxable it will be reported as wages in Box 1 of Form W-2 and separately labeled in Box 12 of Form –W with Code “C”. Individuals cannot avoid this tax by assigning the life insurance policy to another person. The amount included in wages is reduced dollar for dollar by any part of the payment made by employees.
Individuals who retired prior to 1984 at a normal retirement age or on disability are not taxed on premium payments made by their employer, even if the coverage is over $50,000. This is also true for employees who retired after 1983 because of disability and remained covered by their company’s plan. If you retired after 1983 and are not disabled there are certain tests to meet in order to qualify for tax-free coverage over $50,000:
Taxpayers who (1) own more than 5% of a company, (2) own more than 1% of a company and earn over $150,000, or (3) are an officer of a company and earn over $170,000 are considered “key employees”. The $50,000 limit for group-term life insurance premiums may not apply to key employees unless the plan meets nondiscriminatory tests.
Group-term life insurance polices paid by your employer for your spouse or dependents is considered a tax-free de minimis fringe benefit if the policy is $2,000 or less. Policies over $2,000 are considered taxable income.
Taxpayers may set up a health savings account (HSA) if they are covered by a qualifying high deductible health plan (HDHP), they are not enrolled in Medicare, and they are not the dependent of another taxpayer. Both the taxpayer and their employer may contribute to the HSA. There are annual contribution limits, and the same limits apply regardless of who makes the contributions. Earnings in the HSA accumulate tax-free and distributions are also tax-free if used to pay for qualified medical expenses.
A high deductible health plan must have a minimum annual deductible and an annual out-of-pocket maximum. The minimum plan deductible was $1,300 in 2015 for “self-only” coverage and $2,600 for family coverage. The annual out-of-pocket maximum was $6,540 in 2015 for “self-only” coverage and $13,100 for family coverage. The $6,450 / $13,100 limits include plan deductibles, co-payments and other out-of-pocket expenses, but not premiums.
The maximum HSA contribution for an employee with self-only coverage is $3,350 in 2015. The maximum HSA contribution for an employee with family coverage is $6,650 in 2015. Employees over the age of 55 are eligible for an additional $1,000 contribution.
All employer contributions to an HSA are reported on Form 8889. Contributions made by your employer up to the limit are tax-free. They are reported in Box 12 of Form W-2 with Code “W”. If the amount contributed exceeds the limit you will be subject to a 6% penalty on the excess amount (unless it is removed prior to the due date of your tax return). Taxpayers that make contributions can take an “above the line” deduction (adjustment to income).
Taxpayers are not taxed on contributions or insurance premiums their employer makes to a health, hospitalization, or accident plan to cover them, their spouse, their dependents, and their children under age 27 whether or not they can be claimed as a dependent. The tax-free treatment applies to same-sex spouses as well.
If you obtain health and accident coverage by making pre-tax salary-reduction contributions under your employer’s cafeteria plan then your contributions are considered employer contributions and are tax-free. Employer contributions during a period where you are temporarily laid off from work are also tax-free. Insurance paid for by an old employer for retirees is not taxed. Medical coverage provided to a family of a deceased employee is tax-free since it is treated as a continuation of the employee’s fringe benefits. Medicare premiums paid by your employer if you are age 65 or older are not taxed.
Employer contributions to health reimbursement arrangements (HRAs) are tax-free to their employees. The contributions must be paid by the employer and not by salary reduction. HRA contributions can be used to reimburse medical costs for employees, their spouses, and their dependents.
Taxpayers are not taxed on contributions their employer makes for long-term care coverage that would pay them benefits in event they became chronically ill. Long-term care coverage cannot by offered through a cafeteria plan and reimbursements of long-term care expenses cannot by made through a flexible spending arrangement.