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Frequently Asked Tax Questions And Answers
Keyword: Employee Benefits
3.2 Itemized Deductions/Standard Deductions: Education & Work-Related Expenses
Is the exclusion from income of up to $5,250 of employer-provided
educational assistance under a qualified program still available?
Yes. For courses beginning before 2002 it applied only to benefits you
receive for undergraduate courses. Beginning with the year 2002, employer-provided
educational assistance includes graduate level courses. For more information,
refer to Publication 970, Tax Benefits for Education.
References:
4.3 Interest/Dividends/Other Types of Income: 1099–MISC, Independent Contractors, and Self-employed
I received a Form 1099-MISC for an employee bonus. How do I report
it?
Employee bonuses should be reported on Form W-2, not on Form 1099-MISC.
Contact your employer and ask them to issue the correct form. If they will
not issue you a Form W-2 for the bonus, complete Form 4852 (PDF), Substitute for Form W-2, Wage and Tax Statement. The
bonus amount is reported on Line 7 on your Form 1040 or 1040A or line 1 of Form 1040EZ (PDF).
References:
4.6 Interest/Dividends/Other Types of Income: Employee Reimbursements, Form W–2, Wage Inquiries
Is tuition reimbursement for school a form of taxable income or
not?
If you receive educational assistance benefits from your employer under
an educational assistance program, you can exclude up to $5,250 of those benefits
each year. This means your employer should not include the benefits with your
wages, tips, and other compensation shown in box 1 of your Form W-2. You do
not have to include the benefits on your income tax return. The exclusion
also applies to educational assistance for graduate level courses.
To qualify as an educational assistance program, the plan must be written
and must meet certain other requirements. Your employer can tell you whether
there is a qualified program where you work.
Tax-free educational assistance benefits include payments for tuition,
fees and similar expenses, books, supplies, and equipment. The payments do
not have to be for work-related courses. Educational assistance benefits do
not include payments for the following items:
(1) Meals, lodging, transportation, or tools or supplies (other than textbooks)
that you can keep after completing the course of instruction.
(2) Education involving sports, games, or hobbies unless the education
has a reasonable relationship to the business of your employer, or is required
as part of a degree program.
References:
For further information, please see,Publication 970 , Tax
Benefits for Education .
Tax Topic 513 Tax Topic 513, Education Expenses
References:
My employer is including amounts paid graduate school related expenses
on my Form W-2. Where do I claim education expenses on my Form 1040?
The law changed in 2002 to allow up to $5,250 in graduate school related
expenses paid by educational assistance program to be excluded from gross
income. If your employer has included amounts paid for graduate school related
expenses amounting to $5,250 or less with your wages, tips, and other compensation
shown in box 1 of your W-2, ask your employer for a corrected W-2. If you
have received amounts for graduate school related expenses that are includable
in gross income, you may deduct expenses attributable to those amounts on Form 1040, Schedule A (PDF), Itemized Deductions.
References:
Is my employer supposed to include mileage reimbursement as a part
of my gross income on my Form W-2, and do I include it on my return as wages,
tips & salaries?
That depends on whether you were reimbursed under an accountable plan or
under a nonaccountable plan. Generally, an employer will have an accountable
plan if it pays business expenses that would otherwise be deductible by the
employee, requires the employee to substantiate the expense, and does not
permit the employee to keep any reimbursements that exceed expenses. If the
employer does not use an accountable plan, mileage reimbursement would be
included in your wages on Form W-2. For more information on reimbursements
and accountable plans, refer to Chapter 6 of Publication 463, Travel,
Entertainment, Gift, and Car Expenses.
If your mileage reimbursement is included in box 1 on Form W-2, you need
to enter that amount on the "wages, salaries, and tips" line of your tax return.
If you itemize your deductions on Form 1040, Schedule A (PDF), Itemized
Deductions, you may deduct the business transportation expense as an
employee business expense, subject to the 2% limitation of adjusted gross
income. You may usually deduct either your actual business automobile expenses
or use the standard mileage rate. For more information on when you may use
the standard mileage rate, refer to Chapter 4 of Publication 463, Travel,
Entertainment, Gift, and Car Expenses.
References:
What is meant by "dependent care benefits" (Box 10 of Form W-2)?
Dependent care benefits are amounts your employer paid directly to either
you or your care provider for the care of your qualifying person(s) while
you worked. They also include the fair market value of care in a day-care
facility provided or sponsored by your employer. Dependent care benefits include
amounts placed into a flexible spending account under a salary reduction arrangement
if the benefit provided was day care. If you have an amount in Box 10 of the Form W-2 (PDF), you must complete Form 2441, Child and Dependent Care Expenses (PDF) when you file the Form 1040.
If you file the Form 1040A (PDF), complete Schedule
2.
References:
Should Line 10, Dependent Care Benefits, of my Form W-2 be included
when calculating my income?
A portion of the amount in Box 10 of the Form W-2 may be includable in
your income. Please refer to the
Instructions for Form 2441, Child
and Dependent Care Expenses, to determine how much, if any, of the dependent
care benefits may be excluded. If you meet the requirements described in Form 2441 (PDF), Child and Dependent Care Expenses,
you can exclude up to $5,000 of dependent care benefits provided under a qualified
employer plan. However, this amount is reduced or eliminated if your earned
income (or your spouse's earned income) is less than $5,000, or if your child
is not under age 13. Any benefits that exceed the exclusion limit ($5,000)
are also includable in your income, and your employer should have included
these amounts in Boxes 1, 3, and 5 of your Form W-2 in addition to reporting
these amounts in Box 10. The amount you can exclude is figured and claimed
by completing Part III of Form 2441 or Schedule 2 of Form 1040A.
References:
7.1 Child Care Credit/Other Credits : Child and Dependent Care Credit & Flexible Benefit Plans
I paid into a dependent care benefits plan and the amount is shown
in Box 10 of my Form W-2. However, the cost paid to the child care provider
was more. Can the additional expense not paid into the dependent care benefits
plan and not shown in Box 10 of the W-2 be claimed on Form 2441?
That depends on the amount you elected to have contributed to the flexible
spending arrangement. The exclusion from income for employer-provided benefits
can be as high as $5,000, while the credit for dependent care expenses is
based on annual dollar limits of $3,000 for one person and $6,000 for two
or more persons. You must reduce those dollar limits by the amount of excludible
dependent care benefits. If you had expenses that you paid yourself and the
employer provided benefits were less than the applicable dollar limit, you
can also claim the credit. Complete Part III of either Form 2441 (PDF), Child and Dependent Care Expenses, or Form 1040A, Schedule 2 (PDF), Child and Dependent Care Expenses for
Form 1040A Filers, to determine the excluded benefits and whether you can
claim the credit.
Change. The applicable percentage and allowable employment-related
expenses increase beginning in 2003. The maximum applicable percentage is
35 percent and the allowable employment-related expenses are $3,000 for one
qualifying child and $6,000 for two or more qualifying children (Code Sec.
21, as amended by the Economic Growth and Tax Relief Reconciliation Act of
2001). Thus, the maximum credit is $1,050 for one qualifying child and $2,100
for two or more qualifying children.
References:
If my employer did not put the amount I paid into a flexible spending
account for dependent care in box 10 on my Form W-2, can I claim the Child
and Dependent Care Tax Credit?
If the omission was simply a clerical oversight, you may not claim the
child care credit. If the flexible spending account was an eligible plan under
Internal Revenue Code Section 125, the amount of the salary reduction that
was contributed to your account should appear in box 10 of your Form W-2.
Request a corrected Form W-2 from your employer.
You may claim the child care credit if the contribution to your flexible
spending account was less than your annual dollar limitation for eligible
expenses ($3,000 for one person, or $6,000 for two or more persons). Even
if you cannot claim the credit, you must complete Part III of either Form 2441 (PDF), Child and Dependent Care Expenses,
or Form 1040A, Schedule 2 (PDF), Child and
Dependent Care Expenses for Form 1040A Filers, to exclude your employer
provided benefits from your income. If the amount you paid into a flexible
spending account reduced your wages in box 1 of Form W-2, it is considered
an employer provided benefit.
References:
I was under the impression that a Dependent Care Benefit Plan would
benefit me, not penalize me with an increase in taxes. How can my employer
say they provided a benefit in the total amount of $3,000 in W-2, Block 10
when I had $3,000 in wages set aside for dependent care benefits?
The actual mechanism for this type of plan is an agreement to voluntarily
reduce your salary in return for an employer-provided fringe benefit. These
plans must be set up this way because you have a choice of whether to receive
the cash wages or the benefits, which would make the benefit taxable to you.
Therefore, the benefits are actually employer provided or funded. You are
receiving a tax benefit because you are not paying taxes on the money that
is set aside.
References:
How do I complete Form 2441 if I have flexible Spending Account?
You must complete Part III of Form 2441 (PDF), Child
and Dependent Care Expenses , (or Form 1040A, Schedule 2 (PDF), Child
and Dependent Care Expenses for Form 1040A Filers) to claim the exclusion
of the benefits from income even if you cannot claim the credit. Enter your
total employer-provided dependent care benefits on line 12 (this amount should
appear in box 10 of your Form W-2) and your qualified expenses on line 15.
The last six lines of Part III will determine whether you can also take the
credit and what your dollar limit is on qualified expenses. Also Complete
Part I, Persons or Organizations Who Provided the Care.
References:
I am self-employed, but did not have a net profit last year. Is
it correct that we do not qualify for the Child Care Credit on our joint return
even though my wife received dependent care benefits on her W-2 box 10?
Generally, yes. When you complete Part III of Form 2441 (PDF), Child and Dependent Care Expenses, which you must do
to claim excluded benefits, line 17 asks you to enter the smallest of:
your dependent care benefits,
your qualified expenses,
your earned income, or
your spouse's earned income.
If you had a loss from self-employment and no other earned income, your
earned income would be $0, unless you can use one of the optional methods
on Form 1040, Schedule SE (PDF), Self-Employment
Tax. That would mean that the amount in box 10 of your wife's Form W-2
would have to be included in income. (For more information on the optional
methods of computing self-employment tax, refer to Publication 533, Self-Employment
Tax, or
Instructions for Form 1040, Schedule SE, Self-Employment
Tax.
The income considered to be earned by a spouse who is a full-time student
or who is incapable of self-care is $250 per month if there's one qualifying
individual in the household, and $500 a month if there are two or more qualifying
individuals. However, this income is deemed to be earned only by one spouse
for any given month. (Code Sec. 21 (d) (2)).
References:
Is a flexible spending account for dependent care a dependent care
benefit?
Yes. If the flexible spending account is providing you with a dependent
care benefit, then it should be reported in box 10 of your Form W-2. These
accounts are funded through a salary reduction, so the contribution to the
account is considered an employer contribution. When you receive a dependent
care benefit from your employer, you must complete Part III of Form 2441 (PDF), Child and Dependent Care Expenses, (or Form 1040A, Schedule 2 (PDF), Child and Dependent Care Expenses for
Form 1040A Filers) to see if the benefits are fully excluded from income.
You may be able to also claim a credit for child and dependent care expenses
if the excluded benefits are less than the dollar limit on qualified expenses
for the credit.
References:
12.3 Small Business/Self-Employed/Other Business : Form W–2, FICA, Medicare, Tips, Employee Benefits
What publications are available that would explain the taxation policy for
Cafeteria Plans and Health Care Flexible Spending Accounts ?
Information on Health Care Flexible Spending Accounts and Cafeteria Plans can be
found in the following sources listed below:
References:
Is an employer required to provide the IRS with a signed receipt from a
dependent care provider in order to release funds that are withheld from an employee's
pretax salary and deposited to a dependent care flexible spending account?
The Internal Revenue Service does not specify a method for the documentation of
reimbursable expenditures. Good accounting and business practices should dictate the
type and sufficiency of documentation provided by employees who claim reimbursable
expenses. Please review the plan document to determine if it specifies the type(s)
of documentation acceptable.
References:
Can an employer pay for health care costs of an employee as a fringe benefit?
Yes, generally an employer may pay for health care costs of an employee as a nontaxable
fringe benefit. Refer to Publication 535, Business Expenses , for a
complete discussion of employee benefit programs.
References:
If our company pays for the employee's health care costs directly to the
medical facility, as opposed to a reimbursement, is the employee benefit reported
on Form W-2 and subject to social security withholding?
Health care costs paid directly to the medical facility is normally a nontaxable
employee benefit provided that it is paid as part of an accident and health plan.
Refer to Publication 535, Business Expenses, for more information on
employee benefit programs.
References:
If an employer pays health insurance benefits for the employee and dependents,
are both the employee's and the dependent's benefits income to the employee?
If an employer provides health insurance for the employees, the benefit provided
is generally not taxable to the employee. An employer can generally deduct the cost
of a group health plan on the "employee benefit programs" line of their business income
tax return.
Group health plan defined: This (including a self-insured plan) is a plan that
provides medical care to your employees, former employees, and their spouses and dependents.
The plan can provide care directly or through insurance, reimbursement, or otherwise.
The employer can exclude the cost of providing group health insurance to an employee
from his or her wages.
References:
If we give an employee a monthly car allowance, must it be included in the
employee's taxable wages on their Form W-2?
Generally yes, unless paid under an accountable plan.
To be an accountable plan, your reimbursement or expense allowance arrangement
must meet the qualifying requirements, explained later. A reimbursement or expense
allowance arrangement is a system by which you substantiate and pay the advances,
reimbursements, and charges for your employees' business expenses. If you make a single
payment to your employees and it includes both wages and an expense reimbursement,
you must specify the amount of the reimbursement.
Qualifying requirements. To qualify as an accountable plan,
your reimbursement or expense allowance arrangement must require your employees to
meet all of the following rules:
They must have paid or incurred deductible expenses while performing services
as your employees,
They must adequately account to you for these expenses within a reasonable period
of time, and
They must return any excess reimbursement or allowance within a reasonable period
of time.
Please refer to Publication 535, Business Expenses, for additional
information about accountable and nonaccountable plans.
References:
If our business pays for an employee's airfare on a business trip, but the
employee does not submit an expense form relating to the travel, do we need to issue
a Form 1099-MISC?
No, you should report the amounts as wages on Form W-2. Generally, Form 1099-MISC
is not issued to employees. Payments to your employee for travel and other necessary
expenses of your business under a nonaccountable plan are wages and subject to income
tax withholding and payment of social security, Medicare, and FUTA taxes. Your payments
are treated as paid under a nonaccountable plan if:
Your employee is not required to or does not substantiate timely those expenses
to you with receipts or other documentation, or
You advance an amount to your employee for business expenses and your employee
is not required to or does not return timely any amount he or she does not use for
business expenses.
The amount of the airfare should be included on the employee's Form W-2.
References:
How should a tuition reimbursement program for employees be reported as
income to an employee? Should the employee be taxed at the 27%, 25% rate for payments
made after May 28, 2003, rate for supplemental payments on the next pay check after
successful completion of the course or is this something that we just include on the
W-2?
If the tuition reimbursements do not qualify as a tax free fringe benefit under
the rules for Educational Assistance Programs or as a Working Condition Fringe Benefit,
the tuition reimbursement is wages for Federal Income Tax, Social Security, and Medicare
Tax purposes.
For employment tax and withholding purposes, you can treat fringe benefits as paid
on a pay period, a quarter, a semiannual, annual, or other basis as long as the benefits
are treated as paid no less frequently than annually. You do not have to choose the
same period for all employees.
You can change the period as often as you like as long as you treat all the benefits
provided in a calendar year as paid no later than December 31. You can also treat
the value of a single fringe benefit as paid on one or more dates in the same calendar
year, even if the employee receives the entire benefit at one time.
You can add the value of fringe benefits to regular wages for a payroll period
and figure income tax withholding on the total, or you can withhold Federal income
tax on the value of fringe benefits at the flat 27% (25% rate for payments made after
May 28, 2003) applicable to supplemental wages. You must withhold the applicable income,
social security, and Medicare taxes on the date or dates you chose to treat the benefits
as paid. Deposit the amounts withheld as discussed in section 11 of Publication 15, Circular
E, Employer's Tax Guide .
References:
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