Estefania has income and deductions as a consultant for 2019 that are summarized as follows:
Gross income from sole proprietorship $148,500
Cash operating expenses for sole proprietorship 24,250
Estefania pays for her own medical insurance coverage (for herself and her immediate family) at $950 per month and places $1,000 per month in a personal retirement account.
Estefania’ primary client, Cheng Ltd., has offered her a job with a salary of $95,500. The company will provide equivalent medical coverage, cover all business expenses, and match Estefania’ contributions to a § 401(k) plan up to $500 per month.
Estimate the value of unemployment coverage and workers’ compensation coverage. If in doubt, use 4% and 6%, respectively, of salary.
Complete an analysis of Estefania’s net cash flow currently, and assuming she sees no substantial differential risks, her net cash flow if shee accepts the offer. Advise Estefania as to whether she should accept the offer.
Estefania’s other income is equal to her other deductions, so you may assume that this is her taxable income. Furthermore, the only income tax that is relevant is the tax on the income under the two possibilities. You may assume that the marginal tax on this income is 27 percent.[Show your work!].
Estephania was a gig worker who is currently classified as an employee under California’s Assembly Bill 5 (effective January 1, 2020).
Taxation of Individuals and Business
Entities
2020 Edition
Chapter 12
Compensation
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
1. Explain the tax implications of
compensation in the form of salary and
wages from the perspective of the
employee and employer.
2. Describe the tax implications of various
forms of equity-based compensation from
the perspective of the employee and
employer.
3. Compare and contrast taxable and
nontaxable fringe benefits and explain
their tax consequences for the employee
and employer.
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-2
Salary and Wages (1 of 6)
• Employee Considerations for Salary and
Wages
– Fixed amount of compensation for the current
year no matter how many hours worked
– Salaried employees are eligible for bonuses.
– Employees receiving wages generally get paid
by the hour.
– Salary, bonus, and wages taxed as ordinary
income.
– They report their wages on page 2, line 1 of
the 2018 1040 federal tax return.
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-3
Salary and Wages (2 of 6)
• Withholding Taxes
– Employees complete a Form W-4 to supply the
information the firm needs to withhold the
correct amount of tax and also to indicate:
▪ Whether to withhold at the single rate or at the lower
married rate.
▪ The number of withholding or “personal” allowances
the employee chooses to claim.
▪ Whether the employee wants an additional amount of
tax withheld each period above the amount based on
the number of allowances claimed.
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-4
Salary and Wages (3 of 6)
• Form W-2
– Summarizes an employee’s taxable salary and
wages
– Provides annual federal and state withholding
information
– Generated by employer on an annual basis
• Form W-4
– Supplies an employee’s withholding information
to employer
– Generated by employee
– Remains constant unless employee makes
changes
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-5
Salary and Wages (4 of 6)
• Employer Considerations for Salary and
Wages
– Deductibility of Salary Payments—General Rule
▪ Employers computing taxable income under:
o Cash method of accounting generally deduct salary and
wages when they pay the employee
o Accrual method generally deduct wages payable to
employees as the employees earn the wages
▪ Compensation expense accrued at end of year is
deductible in year accrued if
o Paid to an unrelated party
o Paid within two and a half months of year-end
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-6
Salary and Wages (5 of 6)
▪ Compensation expense accrued at end of year is
deductible when
o Paid to related party
o Related party (employee) owns > 50 percent of the
value of the employer corporation
▪ After-tax cost of providing this salary is generally
much less than the before-tax cost, as the employer
deducts the salary and associated FICA taxes paid.
▪ After-Tax Cost of Salary formula
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-7
After-Tax Cost of Salary
Question
• XYZ Inc. paid one of its employees
$80,000. The company is in the 21
percent tax bracket. What is the after-tax
cost of the salary to XYZ Inc.?
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-8
After-Tax Cost of Salary
Solution
• Before-tax cost = Salary
– Total cost = $80,000
• After-tax cost = $80,000 × (1 – 21%)
– So the after-tax cost = $63,200
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-9
Salary and Wages (6 of 6)
• Limits on salary deductibility
– Determining whether compensation is
reasonable in amount is a “facts and
circumstances test” that involves:
▪ Considering the duties of the employee
▪ Complexities of the business, and
▪ Amount of salary compared with the income of the
business, among other things.
– $1,000,000 maximum annual compensation
deduction per person
– Limited—applies to CEO, CFO, three other
highest compensated officers, and all covered
employees from prior years
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-10
Equity-Based Compensation
(1 of 11)
• Stock Options
– Incentive stock options: provide favorable tax
treatment to employees
– Nonqualified stock options: options that don’t
meet the requirements for being classified as
incentive stock options
– Grant date: Date on which employees are
initially allocated stock options
– Exercise date: Date that employees purchase
stock using their options
– Exercise price: Amount paid to acquire shares
with stock options
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-11
Equity-Based Compensation
(2 of 11)
– Bargain element: Difference between the fair
market value of stock and the exercise price on
the exercise date
– Vesting date: Time when stock options granted
can be exercised
– Employee Considerations for Stock Options
▪ Nonqualified stock options
o When exercising NQOs, employees report ordinary
income equal to the total bargain element on the
shares of stock acquired (whether they hold the shares
or sell them immediately).
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-12
Equity-Based Compensation
(3 of 11)
o Taxpayer’s basis in NQOs acquired is the fair market
value on the date of exercise.
o Basis includes the exercise price plus the ordinary
income the taxpayer recognizes on the bargain
element.
▪ Incentive stock options
o Basis in shares acquired with ISOs is the exercise price.
o Holding period for stock acquired with NQOs and ISOs
begins on the exercise date.
o Here bargain element is added to taxpayer’s alternative
minimum taxable income.
▪ For either type of options, employees experience no
tax consequences on the grant date or vesting date.
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-13
Equity-Based Compensation
(4 of 11)
▪ Any future appreciation or depreciation of the stock
will be treated as either short-term or long-term
capital gain or loss depending on the holding period
(begins on the date of exercise).
– Employer Tax Considerations for Stock Options
▪ Nonqualified options
o No tax consequences on grant date
o On exercise date, bargain element is treated as
ordinary (compensation) income to employee.
o Employee holds stock with holding period beginning on
date of exercise.
o Employers deduct bargain element as compensation
expense on exercise date.
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-14
Equity-Based Compensation
(5 of 11)
▪ Incentive stock options
o No tax consequences on grant date and exercise date
(if employee holds for two years after grant date and
one year after exercise date)
o If holding requirements are not met (if there is a
disqualifying disposition), option becomes an NQO.
o When employee sells stock, employee recognizes longterm capital gain.
o No deduction for employers unless employee doesn’t
meet holding requirements.
o Employers typically don’t view ISOs as being as
favorable as NQOs, because:
➢ ISOs don’t provide them with the same tax benefits
(no tax deduction).
➢ IRS regulatory requirements for ISOs can be
cumbersome.
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-15
Equity-Based Compensation
(6 of 11)
o Firms with high marginal tax rates may lose significant
tax benefits by issuing ISOs rather than NQOs.
o On the other hand, start-up companies or firms with
net operating losses may actually benefit by issuing
ISOs instead of NQOs.
▪ Accounting Issues
o For tax purposes, employer deducts bargain element
on exercise date.
o For GAAP purposes, employer expenses the estimated
value of the option pro rata over the vesting period.
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-16
Equity-Based Compensation
(7 of 11)
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-17
Stock Options Questions
• Mary is offered 7,000 options on Jan. 1, 2015.
They vest on Jan. 1, 2018. The exercise price is
$10 per share. On Jan. 1, 2018, she exercises all
7,000 options when the price is $17 per share.
She holds the stock for two years and sells all
7,000 shares for $20 per share. She is in the 24
percent tax bracket. What is her tax liability on
the grant date, exercise date, and date of sale?
– If the options are ISOs?
– If the options are NQOs?
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-18
Stock Options Solution (1 of 2)
• If the options are ISOs:
– Grant date: No tax liability
– Exercise Date: No tax liability
– Sale Date: Because she held the stock for one
year after exercise date she will be taxed on
the full appreciation from the exercise price at
preferential rates. $10 per share appreciation
times 7,000 shares = 70,000 gain
▪ Tax liability = 70,000 × .15 = $10,500 tax
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-19
Stock Options Solution (2 of 2)
• If options are NQOs:
– Grant date: No tax liability
– Exercise date: $7 bargain purchase × 7,000
shares = $49,000 × 24% = $11,760
– Sale date: $3 appreciation × 7,000 shares =
$21,000 × 15% = $3,150
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-20
Equity-Based Compensation
(8 of 11)
• Restricted Stock
– Can’t be sold or otherwise treated as owned by
employees until employees legally have the
right to sell the shares on the vesting date
– Employees receive restricted stock on the
vesting date without having to pay for it, after
which they can either sell it immediately or
retain it.
– Employee Considerations for Restricted Stock
▪ Restricted stock is taxed on the full fair market value
of the shares on the date the restricted stock vests.
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-21
Equity-Based Compensation
(9 of 11)
▪ Without 83(b) Election
o No tax consequences on grant date
o Employee recognizes ordinary income on value of stock
on vesting date
o Holding period for stock begins on vesting date
o Employer deducts value of stock on vesting date
▪ With Section 83(b) Election
o On grant date, employee recognizes market value of
stock as ordinary income
o Employee takes fair market value basis in stock
o Holding period for stock begins on grant date
o If employee never vests, no deduction for basis in
stock
o Employer deducts value of stock on grant date
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-22
Equity-Based Compensation
(10 of 11)
– Employer Tax Considerations for Restricted
Stock
▪ Timing of the deduction is determined by the
employee’s decisions regarding an 83(b) election.
▪ Other nontax issues
o For tax purposes, employers deduct the market value
of stock when the employee recognizes income.
o For GAAP purposes, employers deduct the grant date
value over the vesting period.
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-23
Restricted Stock Question
• James received 4,000 shares of restricted stock
on June 1, 2017, when the stock was valued at
$3 per share. The shares vest on June 1, 2018,
when the shares are valued at $8 per share. He
sells the shares on the vesting date. He is in the
24 percent tax bracket. What is his tax liability on
the grant date and vesting date?
– If he doesn’t make an 83(b) election?
– If he makes an 83(b) election?
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-24
Restricted Stock Solution
• If 83(b) election is not made:
– Grant date: no tax liability
– Vesting date: $8 per share × 4,000 shares =
$32,000 × .24 = $7,680 tax liability
• If 83(b) election is made:
– Grant date: $3 per share × 4,000 shares =
$12,000 × .24 = $2,880 tax liability
– Vesting date/sales date: $5 appreciation ×
4,000 shares = $20,000 × .15 = $3,000 tax
liability
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-25
Equity-Based Compensation
(11 of 11)
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-26
Fringe Benefits (1 of 13)
• Employers often provide noncash benefits to
employees in addition to their cash
compensation.
• Ranges from common (health insurance) to
the exotic (use of a corporate aircraft)
• Taxable to the employee on receipt
• IRC §61(a) indicates that “gross income
means all income from whatever source
derived, including
– Compensation for services, including fees,
commissions, fringe benefits, and similar items”
(emphasis added).
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-27
Fringe Benefits (2 of 13)
• Taxable Fringe Benefits
– Employees recognize compensation income on all
benefits received unless specifically excluded by tax
laws.
– Treats benefits received like taxable cash
compensation
– Employer deducts cost and pays employee’s share
of FICA taxes on benefit.
– Employee Considerations for Taxable Fringe
Benefits
▪ Employees may prefer a taxable benefit to an equivalent
amount of cash when they benefit from employerprovided quantity or group discounts associated with
the benefit.
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-28
Fringe Benefits (3 of 13)
▪ Employees must recognize a certain amount of gross
income when employers pay life insurance premiums for
the employee for policies with a death benefit in excess
of $50,000.
– To compute the annual taxable benefit, taxpayers
use the following steps:
▪ Step 1: Subtract $50,000 from the death benefit of their
employer-provided group-term life insurance policy.
▪ Step 2: Divide the Step 1 result by $1,000.
▪ Step 3: Multiply the result from Step 2 by the cost per
$1,000 of protection for one month from the table
provided in the Treasury Regulations based on the
taxpayer’s age.
▪ Step 4: Multiply the outcome of Step 3 by 12 (months).
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-29
Fringe Benefits (4 of 13)
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-30
Fringe Benefits (5 of 13)
– Employer Considerations for Taxable Fringe
Benefits
▪ Treat taxable fringe benefits just like cash
compensations
▪ Has an outlay for the cost of the benefit and must
pay the employer’s share of FICA taxes on the
taxable portion of benefits it provides to employees
▪ Deducts its cost of the benefit (plus FICA taxes), not
the value of the benefit to the employee
▪ Are often able to purchase fringe benefits at a lower
cost than can individual employees
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-31
Fringe Benefits (6 of 13)
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-32
Fringe Benefits (7 of 13)
• Nontaxable Fringe Benefits
–
–
–
–
–
–
Specifically identified in the Code
Employee excludes benefit from taxable income
Employer deducts cost when benefit is paid
Group-Term Life Insurance
Health and Accident Insurance and Benefits
Meals and Lodging for the Convenience of the
Employer
– Employee Educational Assistance
– Dependent Care Benefits
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-33
Fringe Benefits (8 of 13)
–
–
–
–
–
–
No-Additional-Cost Services
Qualified Employee Discounts
Working Condition Fringe Benefits
De Minimis Fringe Benefits
Qualified Transportation Fringe Benefits
Cafeteria Plans and Flexible Spending Accounts
(FSAs)
– Employee and Employer Considerations for
Nontaxable Fringe Benefits
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-34
Fringe Benefits (9 of 13)
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-35
Fringe Benefits (10 of 13)
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-36
Fringe Benefits (11 of 13)
• Tax Planning with Fringe Benefits
– Example
▪ Employer proposed to reimburse employee $200 a
month for his parking costs. What amount of this
reimbursement would be a nontaxable qualified
transportation fringe benefit to employee?
▪ Answer: All $2,400. Employee can exclude up to
$250 per month ($3,000 per year) as a qualified
transportation fringe benefit.
– IRS publication 15-B “Employer’s Tax Guide to
Fringe Benefits” (available at IRS) provides tax
guidance for employers providing fringe
benefits.
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-37
Fringe Benefits (12 of 13)
• Fringe Benefits Summary
– Both taxable and nontaxable can make up a
significant portion of an employee’s
compensation
– Are taxable unless the tax laws specifically
exclude them from gross income
– Taxable fringe benefits usually represent a
luxury perk, while nontaxable fringe benefits
are generally excluded for public policy
reasons.
– At this point, you should be able to distinguish
between taxable and nontaxable fringe
benefits.
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-38
Fringe Benefits (13 of 13)
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-39
End of Presentation
Copyright ©2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-40
WORKER
COMPENSATION
Its Not Always in a Check!
Worker Classification
Employee v. Independent Contractor
The government favors employee status, generally
because of third-party reporting (Form W-2) and
withholding.
Tax at issue is income tax withholding, FICA, MHI,
etc.
Weigh the factors various factors to determine
status.
Does the employer provide space, implements,
instructions, supervision, etc.
No particular weighting system is used.
Comparisons
Employee
Pays FICA and MHI on gross through withholding,
employer matches.
Federal income tax is withheld.
Employer generally bears burden of expenses.
Contractor
Pays OASDI and MHI on net (self-employment tax)
Contractor generally qualifies for qualified business
income deduction.
Generally bears burden of expenses.
IRS Resources
Published Guidelines
https://www.irs.gov/newsroom/understandi
ng-employee-vs-contractor-designation
Request for Determination—Form SS-8
https://www.irs.gov/pub/irs-pdf/fss8.pdf
Behavioral Control
A worker is an employee when the business has the right to direct and
control the work performed by the worker, even if that right is not
exercised.
Behavioral control categories are:
– Type of instructions given, such as when and where to work, what tools
to use or where to purchase supplies and services. Receiving the types
of instructions in these examples may indicate a worker is an employee.
– Degree of instruction, more detailed instructions may indicate that the
worker is an employee. Less detailed instructions reflects less control,
indicating that the worker is more likely an independent contractor.
– Evaluation systems to measure the details of how the work is done
points to an employee. Evaluation systems measuring just the end
result point to either an independent contractor or an employee.
– Training a worker on how to do the job — or periodic or on-going
training about procedures and methods — is strong evidence that the
worker is an employee. Independent contractors ordinarily use their
own methods.
Financial Control
Does the business have a right to direct or control the financial and
business aspects of the worker’s job?
Consider:
– Significant investment in the equipment the worker uses in
working for someone else.
– Unreimbursed expenses, independent contractors are more likely
to incur unreimbursed expenses than employees.
– Opportunity for profit or loss is often an indicator of an
independent contractor.
– Services available to the market. Independent contractors are
generally free to seek out business opportunities.
– Method of payment. An employee is generally guaranteed a
regular wage amount for an hourly, weekly, or other period of
time even when supplemented by a commission. However,
independent contractors are most often paid for the job by a flat
fee.
Relationship
The type of relationship depends upon how the worker and business
perceive their interaction with one another.
This includes:
– Written contracts which describe the relationship the parties intend
to create. Although a contract stating the worker is an employee or an
independent contractor is not sufficient to determine the worker’s
status.
– Benefits. Businesses providing employee-type benefits, such as
insurance, a pension plan, vacation pay or sick pay have employees.
Businesses generally do not grant these benefits to independent
contractors.
– The permanency of the relationship is important. An expectation that
the relationship will continue indefinitely, rather than for a specific
project or period, is generally seen as evidence that the intent was to
create an employer-employee relationship.
– Services provided which are a key activity of the business. The extent
to which services performed by the worker are seen as a key aspect of
the regular business of the company.
Statutory Employee
If workers are independent contractors under the common law rules, such
workers may nevertheless be treated as employees by statute (statutory
employees) for certain employment tax purposes if they fall within any
one of the following four categories and meet the three conditions
described under Social Security and Medicare taxes, below.
A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery
products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is
paid on commission.
A full-time life insurance sales agent whose principal business activity is selling life insurance or
annuity contracts, or both, primarily for one life insurance company.
An individual who works at home on materials or goods that you supply and that must be
returned to you or to a person you name, if you also furnish specifications for the work to be
done.
A full-time traveling or city salesperson who works on your behalf and turns in orders to you
from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar
establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s
business operation. The work performed for you must be the salesperson’s principal business
activity.
https://www.irs.gov/businesses/small-businesses-selfemployed/statutory-employees
Withholding Required for
Statutory Employee
■ Withhold Social Security and Medicare taxes from the
wages of statutory employees if all three of the following
conditions apply.
–
–
–
The service contract states or implies that substantially all the services
are to be performed personally by them.
They do not have a substantial investment in the equipment and
property used to perform the services (other than an investment in
transportation facilities).
The services are performed on a continuing basis for the same payer.
Statutory Independent
Contractors
■ There are three categories of statutory nonemployees:
direct sellers (sales outside a regular place of business),
licensed real estate agents and certain companion sitters.
Direct sellers and licensed real estate agents are treated as self-employed for
all Federal tax purposes, including income and employment taxes, if:
Substantially all payments for their services as direct sellers or real estate agents are
directly related to sales or other output, rather than to the number of hours worked,
– and Their services are performed under a written contract providing that they will not be
treated as employees for Federal tax purposes.
Companion sitters who are not employees of a companion sitting placement
service are generally treated as self-employed for all federal tax purposes.
■ https://www.irs.gov/businesses/small-businesses-selfemployed/statutory-nonemployees
Employee Compensation With Cash
Included in income under the taxpayer’s method of
accounting.
Wages and salaries are subject to withholding.
Technically, expense reimbursements are included in
gross income.
The reimbursed expenses are deductible for AGI
(assuming the employee “accounts” to the
employer)
Unreimbursed employee expenses are not
deductible.
Employee Benefits
Tax-preferred benefits
–
–
–
–
Medical benefits, including flexible spending accounts
Child care, including flexible spending accounts
Group-term life insurance up to $50,000
Additional Fringe Benefits—No additional cost, employee
discounts, working condition, and de minimus benefits.
– Etc., including meals and lodging.
Tax-preferred benefits are due to the fact that an
employer can deduct the benefits as compensation and
the benefits may be tax-free or tax-deferred.
– Before tax v. after-tax (the before tax value of a tax-free
benefit is generally the value of the benefit divided by 1 – the
marginal tax rate.
Compensation with Property
Sec 83 controls.
One generally has taxable income equal to the fair
market value of the property on the day it is
received.
Restricted property is included at the time all
restrictions lapse, based on the then fmv (e.g., the
property cannot be transferred unless the recipient
works five more years.)
Sec. 83(b) allows the recipient of “restricted property”
to report the current value upon receipt (rather than
risk major increases in values).
Employee makes the election by notifying the
employer within 30 days.
About Stock Options
Nonqualified
– Generally, employee stock options cannot be valued on the date
of grant, so no income is recognized.
– Income is recognized on the date of exercise in the amount of the
bargain element (fmv – option price)
– Capital gain on sale.
Incentive Stock Options
– Exercise price must be > the fmv on the date of grant.
– Exercise must beat least a year after grant. No income at
exercise, but the bargain element is an AMT adjustment.
– If stock held > a year, all gain is LTCG; otherwise, ordinary income.
Other Retirement Plans
Company Plans
– Pension, profit sharing, etc.
– Employer gets deduction now, employee has income upon
distribution.
– Limits based on defined benefit and defined contribution
arrangements.
Roth arrangements
No deduction or exclusion upon contribution.
Withdrawals are tax free if the account has been open for 5 years and
the owner is 59 ½ years of age.
Some Other Critical factors
– Vesting: A participant’s benefits must meet specific vesting
schedules, generally 5 years.
– Early withdrawals: Early distributions, those neither after
age 59.5 nor as a life annuity, are subject to penalty.
Federal penalty, 10%; California, 2.5%.
– Required distributions are required once one reaches age
70.5.
Proposal passed by the House would raise age to 72.
Taxpayers can make Qualified Charitable Distributions
to Charities—Not limited to RMDs, but limited to
$100,000 per year
More Types of Plans
Self-employed’s plans.
– Examples include Keogh Plans, SEP IRAs and
SIMPLES
– Cover the proprietor(s) and their employees
Individual Plans
– IRAs and Roth IRAs
– Intended for those not participating in
employer sponsored plans and those with
lower levels of income.
Contributions and Distributions
Contribution Limits
– Defined benefit—The funded benefit cannot exceed the lesser
of the amount required to fund a benefit of $225,000 (2019)
or 100% of the employee’s current compensation.
– Defined contribution—The contribution cannot exceed
$56,000 (2019)
– Elaborate rules apply to prevent discrimination in favor of
highly compensated individuals
Distributions
– Early distributions and penalties
No penalty for lump-sums after age-59.5 or annuities for life.
Penalty is 10% (plus 2.5% if in California)
– Required distributions
For those reaching age-70.5.
No distributions required from employer plans as long as the employee is
still working.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
