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1040 nr ez Publication 15-B - Main Content Table of Contents 1. 1040 nr ez Fringe Benefit OverviewAre Fringe Benefits Taxable? Cafeteria Plans Simple Cafeteria Plans 2. 1040 nr ez Fringe Benefit Exclusion RulesAccident and Health Benefits Achievement Awards Adoption Assistance Athletic Facilities De Minimis (Minimal) Benefits Dependent Care Assistance Educational Assistance Employee Discounts Employee Stock Options Employer-Provided Cell Phones Group-Term Life Insurance Coverage Health Savings Accounts Lodging on Your Business Premises Meals Moving Expense Reimbursements No-Additional-Cost Services Retirement Planning Services Transportation (Commuting) Benefits Tuition Reduction Working Condition Benefits 3. 1040 nr ez Fringe Benefit Valuation RulesGeneral Valuation Rule Cents-Per-Mile Rule Commuting Rule Lease Value Rule Unsafe Conditions Commuting Rule 4. 1040 nr ez Rules for Withholding, Depositing, and ReportingTransfer of property. 1040 nr ez Amount of deposit. 1040 nr ez Limitation. 1040 nr ez Conformity rules. 1040 nr ez Election not to withhold income tax. 1040 nr ez How To Get Tax Help 1. 1040 nr ez Fringe Benefit Overview A fringe benefit is a form of pay for the performance of services. 1040 nr ez For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work. 1040 nr ez Performance of services. 1040 nr ez   A person who performs services for you does not have to be your employee. 1040 nr ez A person may perform services for you as an independent contractor, partner, or director. 1040 nr ez Also, for fringe benefit purposes, treat a person who agrees not to perform services (such as under a covenant not to compete) as performing services. 1040 nr ez Provider of benefit. 1040 nr ez   You are the provider of a fringe benefit if it is provided for services performed for you. 1040 nr ez You are considered the provider of a fringe benefit even if a third party, such as your client or customer, provides the benefit to your employee for services the employee performs for you. 1040 nr ez For example, if, in exchange for goods or services, your customer provides day care services as a fringe benefit to your employees for services they provide for you as their employer, then you are the provider of this fringe benefit even though the customer is actually providing the day care. 1040 nr ez Recipient of benefit. 1040 nr ez   The person who performs services for you is considered the recipient of a fringe benefit provided for those services. 1040 nr ez That person may be considered the recipient even if the benefit is provided to someone who did not perform services for you. 1040 nr ez For example, your employee may be the recipient of a fringe benefit you provide to a member of the employee's family. 1040 nr ez Are Fringe Benefits Taxable? Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it. 1040 nr ez Section 2 discusses the exclusions that apply to certain fringe benefits. 1040 nr ez Any benefit not excluded under the rules discussed in section 2 is taxable. 1040 nr ez Including taxable benefits in pay. 1040 nr ez   You must include in a recipient's pay the amount by which the value of a fringe benefit is more than the sum of the following amounts. 1040 nr ez Any amount the law excludes from pay. 1040 nr ez Any amount the recipient paid for the benefit. 1040 nr ez The rules used to determine the value of a fringe benefit are discussed in section 3. 1040 nr ez   If the recipient of a taxable fringe benefit is your employee, the benefit is subject to employment taxes and must be reported on Form W-2, Wage and Tax Statement. 1040 nr ez However, you can use special rules to withhold, deposit, and report the employment taxes. 1040 nr ez These rules are discussed in section 4. 1040 nr ez   If the recipient of a taxable fringe benefit is not your employee, the benefit is not subject to employment taxes. 1040 nr ez However, you may have to report the benefit on one of the following information returns. 1040 nr ez If the recipient receives the benefit as: Use: An independent contractor Form 1099-MISC, Miscellaneous Income A partner Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. 1040 nr ez For more information, see the instructions for the forms listed above. 1040 nr ez Cafeteria Plans A cafeteria plan, including a flexible spending arrangement, is a written plan that allows your employees to choose between receiving cash or taxable benefits instead of certain qualified benefits for which the law provides an exclusion from wages. 1040 nr ez If an employee chooses to receive a qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead will not make the qualified benefit taxable. 1040 nr ez Generally, a cafeteria plan does not include any plan that offers a benefit that defers pay. 1040 nr ez However, a cafeteria plan can include a qualified 401(k) plan as a benefit. 1040 nr ez Also, certain life insurance plans maintained by educational institutions can be offered as a benefit even though they defer pay. 1040 nr ez Qualified benefits. 1040 nr ez   A cafeteria plan can include the following benefits discussed in section 2. 1040 nr ez Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance). 1040 nr ez Adoption assistance. 1040 nr ez Dependent care assistance. 1040 nr ez Group-term life insurance coverage (including costs that cannot be excluded from wages). 1040 nr ez Health savings accounts (HSAs). 1040 nr ez Distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care services. 1040 nr ez Benefits not allowed. 1040 nr ez   A cafeteria plan cannot include the following benefits discussed in section 2. 1040 nr ez Archer MSAs. 1040 nr ez See Accident and Health Benefits in section 2. 1040 nr ez Athletic facilities. 1040 nr ez De minimis (minimal) benefits. 1040 nr ez Educational assistance. 1040 nr ez Employee discounts. 1040 nr ez Employer-provided cell phones. 1040 nr ez Lodging on your business premises. 1040 nr ez Meals. 1040 nr ez Moving expense reimbursements. 1040 nr ez No-additional-cost services. 1040 nr ez Transportation (commuting) benefits. 1040 nr ez Tuition reduction. 1040 nr ez Working condition benefits. 1040 nr ez It also cannot include scholarships or fellowships (discussed in Publication 970, Tax Benefits for Education). 1040 nr ez $2,500 limit on a health flexible spending arrangement (FSA). 1040 nr ez   For plan years beginning after December 31, 2012, a cafeteria plan may not allow an employee to request salary reduction contributions for a health FSA in excess of $2,500. 1040 nr ez For plan years beginning after December 31, 2013, the limit is unchanged at $2,500. 1040 nr ez   A cafeteria plan offering a health FSA must be amended to specify the $2,500 limit (or any lower limit set by the employer). 1040 nr ez While cafeteria plans generally must be amended on a prospective basis, an amendment that is adopted on or before December 31, 2014, may be made effective retroactively, provided that in operation the cafeteria plan meets the limit for plan years beginning after December 31, 2012. 1040 nr ez A cafeteria plan that does not limit health FSA contributions to the dollar limit is not a cafeteria plan and all benefits offered under the plan are includible in the employee's gross income. 1040 nr ez   For more information, see Notice 2012-40, 2012-26 I. 1040 nr ez R. 1040 nr ez B. 1040 nr ez 1046, available at www. 1040 nr ez irs. 1040 nr ez gov/irb/2012-26_IRB/ar09. 1040 nr ez html. 1040 nr ez Employee. 1040 nr ez   For these plans, treat the following individuals as employees. 1040 nr ez A current common-law employee. 1040 nr ez See section 2 in Publication 15 (Circular E) for more information. 1040 nr ez A full-time life insurance agent who is a current statutory employee. 1040 nr ez A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. 1040 nr ez Exception for S corporation shareholders. 1040 nr ez   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. 1040 nr ez A 2% shareholder for this purpose is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. 1040 nr ez Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. 1040 nr ez Plans that favor highly compensated employees. 1040 nr ez   If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you must include in their wages the value of taxable benefits they could have selected. 1040 nr ez A plan you maintain under a collective bargaining agreement does not favor highly compensated employees. 1040 nr ez   A highly compensated employee for this purpose is any of the following employees. 1040 nr ez An officer. 1040 nr ez A shareholder who owns more than 5% of the voting power or value of all classes of the employer's stock. 1040 nr ez An employee who is highly compensated based on the facts and circumstances. 1040 nr ez A spouse or dependent of a person described in (1), (2), or (3). 1040 nr ez Plans that favor key employees. 1040 nr ez   If your plan favors key employees, you must include in their wages the value of taxable benefits they could have selected. 1040 nr ez A plan favors key employees if more than 25% of the total of the nontaxable benefits you provide for all employees under the plan go to key employees. 1040 nr ez However, a plan you maintain under a collective bargaining agreement does not favor key employees. 1040 nr ez   A key employee during 2014 is generally an employee who is either of the following. 1040 nr ez An officer having annual pay of more than $170,000. 1040 nr ez An employee who for 2014 is either of the following. 1040 nr ez A 5% owner of your business. 1040 nr ez A 1% owner of your business whose annual pay was more than $150,000. 1040 nr ez Simple Cafeteria Plans Eligible employers meeting contribution requirements and eligibility and participation requirements can establish a simple cafeteria plan. 1040 nr ez Simple cafeteria plans are treated as meeting the nondiscrimination requirements of a cafeteria plan and certain benefits under a cafeteria plan. 1040 nr ez Eligible employer. 1040 nr ez   You are an eligible employer if you employ an average of 100 or fewer employees during either of the 2 preceding years. 1040 nr ez If your business was not in existence throughout the preceding year, you are eligible if you reasonably expect to employ an average of 100 or fewer employees in the current year. 1040 nr ez If you establish a simple cafeteria plan in a year that you employ an average of 100 or fewer employees, you are considered an eligible employer for any subsequent year as long as you do not employ an average of 200 or more employees in a subsequent year. 1040 nr ez Eligibility and participation requirements. 1040 nr ez   These requirements are met if all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate and each employee eligible to participate in the plan may elect any benefit available under the plan. 1040 nr ez You may elect to exclude from the plan employees who: Are under age 21 before the close of the plan year, Have less than 1 year of service with you as of any day during the plan year, Are covered under a collective bargaining agreement, or Are nonresident aliens working outside the United States whose income did not come from a U. 1040 nr ez S. 1040 nr ez source. 1040 nr ez Contribution requirements. 1040 nr ez   You must make a contribution to provide qualified benefits on behalf of each qualified employee in an amount equal to: A uniform percentage (not less than 2%) of the employee’s compensation for the plan year, or An amount which is at least 6% of the employee’s compensation for the plan year or twice the amount of the salary reduction contributions of each qualified employee, whichever is less. 1040 nr ez If the contribution requirements are met using option (2), the rate of contribution to any salary reduction contribution of a highly compensated or key employee can not be greater than the rate of contribution to any other employee. 1040 nr ez More information. 1040 nr ez   For more information about cafeteria plans, see section 125 of the Internal Revenue Code and its regulations. 1040 nr ez 2. 1040 nr ez Fringe Benefit Exclusion Rules This section discusses the exclusion rules that apply to fringe benefits. 1040 nr ez These rules exclude all or part of the value of certain benefits from the recipient's pay. 1040 nr ez The excluded benefits are not subject to federal income tax withholding. 1040 nr ez Also, in most cases, they are not subject to social security, Medicare, or federal unemployment (FUTA) tax and are not reported on Form W-2. 1040 nr ez This section discusses the exclusion rules for the following fringe benefits. 1040 nr ez Accident and health benefits. 1040 nr ez Achievement awards. 1040 nr ez Adoption assistance. 1040 nr ez Athletic facilities. 1040 nr ez De minimis (minimal) benefits. 1040 nr ez Dependent care assistance. 1040 nr ez Educational assistance. 1040 nr ez Employee discounts. 1040 nr ez Employee stock options. 1040 nr ez Employer-provided cell phones. 1040 nr ez Group-term life insurance coverage. 1040 nr ez Health savings accounts (HSAs). 1040 nr ez Lodging on your business premises. 1040 nr ez Meals. 1040 nr ez Moving expense reimbursements. 1040 nr ez No-additional-cost services. 1040 nr ez Retirement planning services. 1040 nr ez Transportation (commuting) benefits. 1040 nr ez Tuition reduction. 1040 nr ez Working condition benefits. 1040 nr ez See Table 2-1, later, for an overview of the employment tax treatment of these benefits. 1040 nr ez Table 2-1. 1040 nr ez Special Rules for Various Types of Fringe Benefits (For more information, see the full discussion in this section. 1040 nr ez ) Treatment Under Employment Taxes Type of Fringe Benefit Income Tax Withholding Social Security and Medicare (including Additional Medicare Tax when wages are paid in excess of $200,000) Federal Unemployment (FUTA) Accident and health benefits Exempt1,2, except for long-term care benefits provided through a flexible spending or similar arrangement. 1040 nr ez Exempt, except for certain payments to S corporation employees who are 2% shareholders. 1040 nr ez Exempt Achievement awards Exempt1 up to $1,600 for qualified plan awards ($400 for nonqualified awards). 1040 nr ez Adoption assistance Exempt1,3 Taxable Taxable Athletic facilities Exempt if substantially all use during the calendar year is by employees, their spouses, and their dependent children and the facility is operated by the employer on premises owned or leased by the employer. 1040 nr ez De minimis (minimal) benefits Exempt Exempt Exempt Dependent care assistance Exempt3 up to certain limits, $5,000 ($2,500 for married employee filing separate return). 1040 nr ez Educational assistance Exempt up to $5,250 of benefits each year. 1040 nr ez (See Educational Assistance , later in this section. 1040 nr ez ) Employee discounts Exempt3 up to certain limits. 1040 nr ez (See Employee Discounts , later in this section. 1040 nr ez ) Employee stock options See Employee Stock Options , later in this section. 1040 nr ez Employer-provided cell phones Exempt if provided primarily for noncompensatory business purposes. 1040 nr ez Group-term life insurance coverage Exempt Exempt1,4, 7 up to cost of $50,000 of coverage. 1040 nr ez (Special rules apply to former employees. 1040 nr ez ) Exempt Health savings accounts (HSAs) Exempt for qualified individuals up to the HSA contribution limits. 1040 nr ez (See Health Savings Accounts , later in this section. 1040 nr ez ) Lodging on your business premises Exempt1 if furnished for your convenience as a condition of employment. 1040 nr ez Meals Exempt if furnished on your business premises for your convenience. 1040 nr ez Exempt if de minimis. 1040 nr ez Moving expense reimbursements Exempt1 if expenses would be deductible if the employee had paid them. 1040 nr ez No-additional-cost services Exempt3 Exempt3 Exempt3 Retirement planning services Exempt5 Exempt5 Exempt5 Transportation (commuting) benefits Exempt1 up to certain limits if for rides in a commuter highway vehicle and/or transit passes ($130), qualified parking ($250), or qualified bicycle commuting reimbursement6 ($20). 1040 nr ez (See Transportation (Commuting) Benefits , later in this section. 1040 nr ez ) Exempt if de minimis. 1040 nr ez Tuition reduction Exempt3 if for undergraduate education (or graduate education if the employee performs teaching or research activities). 1040 nr ez Working condition benefits Exempt Exempt Exempt 1 Exemption does not apply to S corporation employees who are 2% shareholders. 1040 nr ez 2 Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees. 1040 nr ez 3 Exemption does not apply to certain highly compensated employees under a program that favors those employees. 1040 nr ez 4 Exemption does not apply to certain key employees under a plan that favors those employees. 1040 nr ez 5 Exemption does not apply to services for tax preparation, accounting, legal, or brokerage services. 1040 nr ez 6 If the employee receives a qualified bicycle commuting reimbursement in a qualified bicycle commuting month, the employee cannot receive commuter highway vehicle, transit pass, or qualified parking benefits in that same month. 1040 nr ez 7 You must include in your employee's wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance. 1040 nr ez Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. 1040 nr ez Also, show it in box 12 with code “C. 1040 nr ez ” The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax. 1040 nr ez Accident and Health Benefits This exclusion applies to contributions you make to an accident or health plan for an employee, including the following. 1040 nr ez Contributions to the cost of accident or health insurance including qualified long-term care insurance. 1040 nr ez Contributions to a separate trust or fund that directly or through insurance provides accident or health benefits. 1040 nr ez Contributions to Archer MSAs or health savings accounts (discussed in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans). 1040 nr ez This exclusion also applies to payments you directly or indirectly make to an employee under an accident or health plan for employees that are either of the following. 1040 nr ez Payments or reimbursements of medical expenses. 1040 nr ez Payments for specific injuries or illnesses (such as the loss of the use of an arm or leg). 1040 nr ez The payments must be figured without regard to any period of absence from work. 1040 nr ez Accident or health plan. 1040 nr ez   This is an arrangement that provides benefits for your employees, their spouses, their dependents, and their children (under age 27) in the event of personal injury or sickness. 1040 nr ez The plan may be insured or noninsured and does not need to be in writing. 1040 nr ez Employee. 1040 nr ez   For this exclusion, treat the following individuals as employees. 1040 nr ez A current common-law employee. 1040 nr ez A full-time life insurance agent who is a current statutory employee. 1040 nr ez A retired employee. 1040 nr ez A former employee you maintain coverage for based on the employment relationship. 1040 nr ez A widow or widower of an individual who died while an employee. 1040 nr ez A widow or widower of a retired employee. 1040 nr ez For the exclusion of contributions to an accident or health plan, a leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. 1040 nr ez Special rule for certain government plans. 1040 nr ez   For certain government accident and health plans, payments to a deceased plan participant's beneficiary may qualify for the exclusion from gross income if the other requirements for exclusion are met. 1040 nr ez See section 105(j) for details. 1040 nr ez Exception for S corporation shareholders. 1040 nr ez   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. 1040 nr ez A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. 1040 nr ez Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. 1040 nr ez Exclusion from wages. 1040 nr ez   You can generally exclude the value of accident or health benefits you provide to an employee from the employee's wages. 1040 nr ez Exception for certain long-term care benefits. 1040 nr ez   You cannot exclude contributions to the cost of long-term care insurance from an employee's wages subject to federal income tax withholding if the coverage is provided through a flexible spending or similar arrangement. 1040 nr ez This is a benefit program that reimburses specified expenses up to a maximum amount that is reasonably available to the employee and is less than five times the total cost of the insurance. 1040 nr ez However, you can exclude these contributions from the employee's wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. 1040 nr ez S corporation shareholders. 1040 nr ez   Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide to the employee in the employee's wages subject to federal income tax withholding. 1040 nr ez However, you can exclude the value of these benefits (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes. 1040 nr ez Exception for highly compensated employees. 1040 nr ez   If your plan is a self-insured medical reimbursement plan that favors highly compensated employees, you must include all or part of the amounts you pay to these employees in their wages subject to federal income tax withholding. 1040 nr ez However, you can exclude these amounts (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes. 1040 nr ez   A self-insured plan is a plan that reimburses your employees for medical expenses not covered by an accident or health insurance policy. 1040 nr ez   A highly compensated employee for this exception is any of the following individuals. 1040 nr ez One of the five highest paid officers. 1040 nr ez An employee who owns (directly or indirectly) more than 10% in value of the employer's stock. 1040 nr ez An employee who is among the highest paid 25% of all employees (other than those who can be excluded from the plan). 1040 nr ez   For more information on this exception, see section 105(h) of the Internal Revenue Code and its regulations. 1040 nr ez COBRA premiums. 1040 nr ez   The exclusion for accident and health benefits applies to amounts you pay to maintain medical coverage for a current or former employee under the Combined Omnibus Budget Reconciliation Act of 1986 (COBRA). 1040 nr ez The exclusion applies regardless of the length of employment, whether you directly pay the premiums or reimburse the former employee for premiums paid, and whether the employee's separation is permanent or temporary. 1040 nr ez Achievement Awards This exclusion applies to the value of any tangible personal property you give to an employee as an award for either length of service or safety achievement. 1040 nr ez The exclusion does not apply to awards of cash, cash equivalents, gift certificates, or other intangible property such as vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, and other securities. 1040 nr ez The award must meet the requirements for employee achievement awards discussed in chapter 2 of Publication 535, Business Expenses. 1040 nr ez Employee. 1040 nr ez   For this exclusion, treat the following individuals as employees. 1040 nr ez A current employee. 1040 nr ez A former common-law employee you maintain coverage for in consideration of or based on an agreement relating to prior service as an employee. 1040 nr ez A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. 1040 nr ez Exception for S corporation shareholders. 1040 nr ez   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. 1040 nr ez A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. 1040 nr ez Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. 1040 nr ez Exclusion from wages. 1040 nr ez   You can generally exclude the value of achievement awards you give to an employee from the employee's wages if their cost is not more than the amount you can deduct as a business expense for the year. 1040 nr ez The excludable annual amount is $1,600 ($400 for awards that are not “qualified plan awards”). 1040 nr ez See chapter 2 of Publication 535 for more information about the limit on deductions for employee achievement awards. 1040 nr ez    To determine for 2014 whether an achievement award is a “qualified plan award” under the deduction rules described in Publication 535, treat any employee who received more than $115,000 in pay for 2013 as a highly compensated employee. 1040 nr ez   If the cost of awards given to an employee is more than your allowable deduction, include in the employee's wages the larger of the following amounts. 1040 nr ez The part of the cost that is more than your allowable deduction (up to the value of the awards). 1040 nr ez The amount by which the value of the awards exceeds your allowable deduction. 1040 nr ez Exclude the remaining value of the awards from the employee's wages. 1040 nr ez Adoption Assistance An adoption assistance program is a separate written plan of an employer that meets all of the following requirements. 1040 nr ez It benefits employees who qualify under rules set up by you, which do not favor highly compensated employees or their dependents. 1040 nr ez To determine whether your plan meets this test, do not consider employees excluded from your plan who are covered by a collective bargaining agreement, if there is evidence that adoption assistance was a subject of good-faith bargaining. 1040 nr ez It does not pay more than 5% of its payments during the year for shareholders or owners (or their spouses or dependents). 1040 nr ez A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. 1040 nr ez You give reasonable notice of the plan to eligible employees. 1040 nr ez Employees provide reasonable substantiation that payments or reimbursements are for qualifying expenses. 1040 nr ez For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. 1040 nr ez The employee was a 5% owner at any time during the year or the preceding year. 1040 nr ez The employee received more than $115,000 in pay for the preceding year. 1040 nr ez You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. 1040 nr ez You must exclude all payments or reimbursements you make under an adoption assistance program for an employee's qualified adoption expenses from the employee's wages subject to federal income tax withholding. 1040 nr ez However, you cannot exclude these payments from wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. 1040 nr ez For more information, see the Instructions for Form 8839, Qualified Adoption Expenses. 1040 nr ez You must report all qualifying adoption expenses you paid or reimbursed under your adoption assistance program for each employee for the year in box 12 of the employee's Form W-2. 1040 nr ez Use code “T” to identify this amount. 1040 nr ez Exception for S corporation shareholders. 1040 nr ez   For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. 1040 nr ez A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. 1040 nr ez Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, including using the benefit as a reduction in distributions to the 2% shareholder. 1040 nr ez Athletic Facilities You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. 1040 nr ez For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, has not attained the age of 25. 1040 nr ez On-premises facility. 1040 nr ez   The athletic facility must be located on premises you own or lease. 1040 nr ez It does not have to be located on your business premises. 1040 nr ez However, the exclusion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort. 1040 nr ez Employee. 1040 nr ez   For this exclusion, treat the following individuals as employees. 1040 nr ez A current employee. 1040 nr ez A former employee who retired or left on disability. 1040 nr ez A widow or widower of an individual who died while an employee. 1040 nr ez A widow or widower of a former employee who retired or left on disability. 1040 nr ez A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. 1040 nr ez A partner who performs services for a partnership. 1040 nr ez De Minimis (Minimal) Benefits You can exclude the value of a de minimis benefit you provide to an employee from the employee's wages. 1040 nr ez A de minimis benefit is any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administratively impracticable. 1040 nr ez Cash and cash equivalent fringe benefits (for example, use of gift card, charge card, or credit card), no matter how little, are never excludable as a de minimis benefit, except for occasional meal money or transportation fare. 1040 nr ez Examples of de minimis benefits include the following. 1040 nr ez Personal use of an employer-provided cell phone provided primarily for noncompensatory business purposes. 1040 nr ez See Employer-Provided Cell Phones , later in this section, for details. 1040 nr ez Occasional personal use of a company copying machine if you sufficiently control its use so that at least 85% of its use is for business purposes. 1040 nr ez Holiday gifts, other than cash, with a low fair market value. 1040 nr ez Group-term life insurance payable on the death of an employee's spouse or dependent if the face amount is not more than $2,000. 1040 nr ez Meals. 1040 nr ez See Meals , later in this section, for details. 1040 nr ez Occasional parties or picnics for employees and their guests. 1040 nr ez Occasional tickets for theater or sporting events. 1040 nr ez Transportation fare. 1040 nr ez See Transportation (Commuting) Benefits , later in this section, for details. 1040 nr ez Employee. 1040 nr ez   For this exclusion, treat any recipient of a de minimis benefit as an employee. 1040 nr ez Dependent Care Assistance This exclusion applies to household and dependent care services you directly or indirectly pay for or provide to an employee under a dependent care assistance program that covers only your employees. 1040 nr ez The services must be for a qualifying person's care and must be provided to allow the employee to work. 1040 nr ez These requirements are basically the same as the tests the employee would have to meet to claim the dependent care credit if the employee paid for the services. 1040 nr ez For more information, see Qualifying Person Test and Work-Related Expense Test in Publication 503, Child and Dependent Care Expenses. 1040 nr ez Employee. 1040 nr ez   For this exclusion, treat the following individuals as employees. 1040 nr ez A current employee. 1040 nr ez A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. 1040 nr ez Yourself (if you are a sole proprietor). 1040 nr ez A partner who performs services for a partnership. 1040 nr ez Exclusion from wages. 1040 nr ez   You can exclude the value of benefits you provide to an employee under a dependent care assistance program from the employee's wages if you reasonably believe that the employee can exclude the benefits from gross income. 1040 nr ez   An employee can generally exclude from gross income up to $5,000 of benefits received under a dependent care assistance program each year. 1040 nr ez This limit is reduced to $2,500 for married employees filing separate returns. 1040 nr ez   However, the exclusion cannot be more than the smaller of the earned income of either the employee or employee's spouse. 1040 nr ez Special rules apply to determine the earned income of a spouse who is either a student or not able to care for himself or herself. 1040 nr ez For more information on the earned income limit, see Publication 503. 1040 nr ez Exception for highly compensated employees. 1040 nr ez   You cannot exclude dependent care assistance from the wages of a highly compensated employee unless the benefits provided under the program do not favor highly compensated employees and the program meets the requirements described in section 129(d) of the Internal Revenue Code. 1040 nr ez   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. 1040 nr ez The employee was a 5% owner at any time during the year or the preceding year. 1040 nr ez The employee received more than $115,000 in pay for the preceding year. 1040 nr ez You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. 1040 nr ez Form W-2. 1040 nr ez   Report the value of all dependent care assistance you provide to an employee under a dependent care assistance program in box 10 of the employee's Form W-2. 1040 nr ez Include any amounts you cannot exclude from the employee's wages in boxes 1, 3, and 5. 1040 nr ez Report both the nontaxable portion of assistance (up to $5,000) and any assistance above the amount that is non-taxable to the employee. 1040 nr ez Example. 1040 nr ez   Company A provides a dependent care assistance flexible spending arrangement to its employees through a cafeteria plan. 1040 nr ez In addition, it provides occasional on-site dependent care to its employees at no cost. 1040 nr ez Emily, an employee of company A, had $4,500 deducted from her pay for the dependent care flexible spending arrangement. 1040 nr ez In addition, Emily used the on-site dependent care several times. 1040 nr ez The fair market value of the on-site care was $700. 1040 nr ez Emily's Form W-2 should report $5,200 of dependent care assistance in box 10 ($4,500 flexible spending arrangement plus $700 on-site dependent care). 1040 nr ez Boxes 1, 3, and 5 should include $200 (the amount in excess of the nontaxable assistance), and applicable taxes should be withheld on that amount. 1040 nr ez Educational Assistance This exclusion applies to educational assistance you provide to employees under an educational assistance program. 1040 nr ez The exclusion also applies to graduate level courses. 1040 nr ez Educational assistance means amounts you pay or incur for your employees' education expenses. 1040 nr ez These expenses generally include the cost of books, equipment, fees, supplies, and tuition. 1040 nr ez However, these expenses do not include the cost of a course or other education involving sports, games, or hobbies, unless the education: Has a reasonable relationship to your business, or Is required as part of a degree program. 1040 nr ez Education expenses do not include the cost of tools or supplies (other than textbooks) your employee is allowed to keep at the end of the course. 1040 nr ez Nor do they include the cost of lodging, meals, or transportation. 1040 nr ez Educational assistance program. 1040 nr ez   An educational assistance program is a separate written plan that provides educational assistance only to your employees. 1040 nr ez The program qualifies only if all of the following tests are met. 1040 nr ez The program benefits employees who qualify under rules set up by you that do not favor highly compensated employees. 1040 nr ez To determine whether your program meets this test, do not consider employees excluded from your program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining. 1040 nr ez The program does not provide more than 5% of its benefits during the year for shareholders or owners. 1040 nr ez A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. 1040 nr ez The program does not allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance. 1040 nr ez You give reasonable notice of the program to eligible employees. 1040 nr ez Your program can cover former employees if their employment is the reason for the coverage. 1040 nr ez   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. 1040 nr ez The employee was a 5% owner at any time during the year or the preceding year. 1040 nr ez The employee received more than $115,000 in pay for the preceding year. 1040 nr ez You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. 1040 nr ez Employee. 1040 nr ez   For this exclusion, treat the following individuals as employees. 1040 nr ez A current employee. 1040 nr ez A former employee who retired, left on disability, or was laid off. 1040 nr ez A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. 1040 nr ez Yourself (if you are a sole proprietor). 1040 nr ez A partner who performs services for a partnership. 1040 nr ez Exclusion from wages. 1040 nr ez   You can exclude up to $5,250 of educational assistance you provide to an employee under an educational assistance program from the employee's wages each year. 1040 nr ez Assistance over $5,250. 1040 nr ez   If you do not have an educational assistance plan, or you provide an employee with assistance exceeding $5,250, you must include the value of these benefits as wages, unless the benefits are working condition benefits. 1040 nr ez Working condition benefits may be excluded from wages. 1040 nr ez Property or a service provided is a working condition benefit to the extent that if the employee paid for it, the amount paid would have been deductible as a business or depreciation expense. 1040 nr ez See Working Condition Benefits , later, in this section. 1040 nr ez Employee Discounts This exclusion applies to a price reduction you give an employee on property or services you offer to customers in the ordinary course of the line of business in which the employee performs substantial services. 1040 nr ez However, it does not apply to discounts on real property or discounts on personal property of a kind commonly held for investment (such as stocks or bonds). 1040 nr ez Employee. 1040 nr ez   For this exclusion, treat the following individuals as employees. 1040 nr ez A current employee. 1040 nr ez A former employee who retired or left on disability. 1040 nr ez A widow or widower of an individual who died while an employee. 1040 nr ez A widow or widower of an employee who retired or left on disability. 1040 nr ez A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. 1040 nr ez A partner who performs services for a partnership. 1040 nr ez Exclusion from wages. 1040 nr ez   You can generally exclude the value of an employee discount you provide an employee from the employee's wages, up to the following limits. 1040 nr ez For a discount on services, 20% of the price you charge nonemployee customers for the service. 1040 nr ez For a discount on merchandise or other property, your gross profit percentage times the price you charge nonemployee customers for the property. 1040 nr ez   Determine your gross profit percentage in the line of business based on all property you offer to customers (including employee customers) and your experience during the tax year immediately before the tax year in which the discount is available. 1040 nr ez To figure your gross profit percentage, subtract the total cost of the property from the total sales price of the property and divide the result by the total sales price of the property. 1040 nr ez Exception for highly compensated employees. 1040 nr ez   You cannot exclude from the wages of a highly compensated employee any part of the value of a discount that is not available on the same terms to one of the following groups. 1040 nr ez All of your employees. 1040 nr ez A group of employees defined under a reasonable classification you set up that does not favor highly compensated employees. 1040 nr ez   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. 1040 nr ez The employee was a 5% owner at any time during the year or the preceding year. 1040 nr ez The employee received more than $115,000 in pay for the preceding year. 1040 nr ez You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. 1040 nr ez Employee Stock Options There are three kinds of stock options—incentive stock options, employee stock purchase plan options, and nonstatutory (nonqualified) stock options. 1040 nr ez Wages for social security, Medicare, and federal unemployment (FUTA) taxes do not include remuneration resulting from the exercise, after October 22, 2004, of an incentive stock option or under an employee stock purchase plan option, or from any disposition of stock acquired by exercising such an option. 1040 nr ez The IRS will not apply these taxes to an exercise before October 23, 2004, of an incentive stock option or an employee stock purchase plan option or to a disposition of stock acquired by such exercise. 1040 nr ez Additionally, federal income tax withholding is not required on the income resulting from a disqualifying disposition of stock acquired by the exercise after October 22, 2004, of an incentive stock option or under an employee stock purchase plan option, or on income equal to the discount portion of stock acquired by the exercise, after October 22, 2004, of an employee stock purchase plan option resulting from any disposition of the stock. 1040 nr ez The IRS will not apply federal income tax withholding upon the disposition of stock acquired by the exercise, before October 23, 2004, of an incentive stock option or an employee stock purchase plan option. 1040 nr ez However, the employer must report as income in box 1 of Form W-2, (a) the discount portion of stock acquired by the exercise of an employee stock purchase plan option upon disposition of the stock, and (b) the spread (between the exercise price and the fair market value of the stock at the time of exercise) upon a disqualifying disposition of stock acquired by the exercise of an incentive stock option or an employee stock purchase plan option. 1040 nr ez An employer must report the excess of the fair market value of stock received upon exercise of a nonstatutory stock option over the amount paid for the stock option on Form W-2 in boxes 1, 3 (up to the social security wage base), 5, and in box 12 using the code “V. 1040 nr ez ” See Regulations section 1. 1040 nr ez 83-7. 1040 nr ez An employee who transfers his or her interest in nonstatutory stock options to the employee's former spouse incident to a divorce is not required to include an amount in gross income upon the transfer. 1040 nr ez The former spouse, rather than the employee, is required to include an amount in gross income when the former spouse exercises the stock options. 1040 nr ez See Revenue Ruling 2002-22 and Revenue Ruling 2004-60 for details. 1040 nr ez You can find Revenue Ruling 2002-22 on page 849 of Internal Revenue Bulletin 2002-19 at www. 1040 nr ez irs. 1040 nr ez gov/pub/irs-irbs/irb02-19. 1040 nr ez pdf. 1040 nr ez See Revenue Ruling 2004-60, 2004-24 I. 1040 nr ez R. 1040 nr ez B. 1040 nr ez 1051, available at www. 1040 nr ez irs. 1040 nr ez gov/irb/2004-24_IRB/ar13. 1040 nr ez html. 1040 nr ez For more information about employee stock options, see sections 421, 422, and 423 of the Internal Revenue Code and their related regulations. 1040 nr ez Employer-Provided Cell Phones The value of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a working condition fringe benefit. 1040 nr ez Personal use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a de minimis fringe benefit. 1040 nr ez For the rules relating to these types of benefits, see De Minimis (Minimal) Benefits , earlier in this section, and Working Condition Benefits , later in this section. 1040 nr ez Noncompensatory business purposes. 1040 nr ez   You provide a cell phone primarily for noncompensatory business purposes if there are substantial business reasons for providing the cell phone. 1040 nr ez Examples of substantial business reasons include the employer's: Need to contact the employee at all times for work-related emergencies, Requirement that the employee be available to speak with clients at times when the employee is away from the office, and Need to speak with clients located in other time zones at times outside the employee's normal workday. 1040 nr ez Cell phones provided to promote goodwill, boost morale, or attract prospective employees. 1040 nr ez   You cannot exclude from an employee's wages the value of a cell phone provided to promote goodwill of an employee, to attract a prospective employee, or as a means of providing additional compensation to an employee. 1040 nr ez Additional information. 1040 nr ez   For additional information on the tax treatment of employer-provided cell phones, see Notice 2011-72, 2011-38 I. 1040 nr ez R. 1040 nr ez B. 1040 nr ez 407, available at  www. 1040 nr ez irs. 1040 nr ez gov/irb/2011-38_IRB/ar07. 1040 nr ez html. 1040 nr ez Group-Term Life Insurance Coverage This exclusion applies to life insurance coverage that meets all the following conditions. 1040 nr ez It provides a general death benefit that is not included in income. 1040 nr ez You provide it to a group of employees. 1040 nr ez See The 10-employee rule , later. 1040 nr ez It provides an amount of insurance to each employee based on a formula that prevents individual selection. 1040 nr ez This formula must use factors such as the employee's age, years of service, pay, or position. 1040 nr ez You provide it under a policy you directly or indirectly carry. 1040 nr ez Even if you do not pay any of the policy's cost, you are considered to carry it if you arrange for payment of its cost by your employees and charge at least one employee less than, and at least one other employee more than, the cost of his or her insurance. 1040 nr ez Determine the cost of the insurance, for this purpose, as explained under Coverage over the limit , later. 1040 nr ez Group-term life insurance does not include the following insurance. 1040 nr ez Insurance that does not provide general death benefits, such as travel insurance or a policy providing only accidental death benefits. 1040 nr ez Life insurance on the life of your employee's spouse or dependent. 1040 nr ez However, you may be able to exclude the cost of this insurance from the employee's wages as a de minimis benefit. 1040 nr ez See De Minimis (Minimal) Benefits , earlier in this section. 1040 nr ez Insurance provided under a policy that provides a permanent benefit (an economic value that extends beyond 1 policy year, such as paid-up or cash surrender value), unless certain requirements are met. 1040 nr ez See Regulations section 1. 1040 nr ez 79-1 for details. 1040 nr ez Employee. 1040 nr ez   For this exclusion, treat the following individuals as employees. 1040 nr ez A current common-law employee. 1040 nr ez A full-time life insurance agent who is a current statutory employee. 1040 nr ez An individual who was formerly your employee under (1) or (2). 1040 nr ez A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction and control. 1040 nr ez Exception for S corporation shareholders. 1040 nr ez   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. 1040 nr ez A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. 1040 nr ez Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. 1040 nr ez The 10-employee rule. 1040 nr ez   Generally, life insurance is not group-term life insurance unless you provide it to at least 10 full-time employees at some time during the year. 1040 nr ez   For this rule, count employees who choose not to receive the insurance unless, to receive it, they must contribute to the cost of benefits other than the group-term life insurance. 1040 nr ez For example, count an employee who could receive insurance by paying part of the cost, even if that employee chooses not to receive it. 1040 nr ez However, do not count an employee who must pay part or all of the cost of permanent benefits to get insurance, unless that employee chooses to receive it. 1040 nr ez A permanent benefit is an economic value extending beyond one policy year (for example, a paid-up or cash-surrender value) that is provided under a life insurance policy. 1040 nr ez Exceptions. 1040 nr ez   Even if you do not meet the 10-employee rule, two exceptions allow you to treat insurance as group-term life insurance. 1040 nr ez   Under the first exception, you do not have to meet the 10-employee rule if all the following conditions are met. 1040 nr ez If evidence that the employee is insurable is required, it is limited to a medical questionnaire (completed by the employee) that does not require a physical. 1040 nr ez You provide the insurance to all your full-time employees or, if the insurer requires the evidence mentioned in (1), to all full-time employees who provide evidence the insurer accepts. 1040 nr ez You figure the coverage based on either a uniform percentage of pay or the insurer's coverage brackets that meet certain requirements. 1040 nr ez See Regulations section 1. 1040 nr ez 79-1 for details. 1040 nr ez   Under the second exception, you do not have to meet the 10-employee rule if all the following conditions are met. 1040 nr ez You provide the insurance under a common plan covering your employees and the employees of at least one other employer who is not related to you. 1040 nr ez The insurance is restricted to, but mandatory for, all your employees who belong to, or are represented by, an organization (such as a union) that carries on substantial activities besides obtaining insurance. 1040 nr ez Evidence of whether an employee is insurable does not affect an employee's eligibility for insurance or the amount of insurance that employee gets. 1040 nr ez   To apply either exception, do not consider employees who were denied insurance for any of the following reasons. 1040 nr ez They were 65 or older. 1040 nr ez They customarily work 20 hours or less a week or 5 months or less in a calendar year. 1040 nr ez They have not been employed for the waiting period given in the policy. 1040 nr ez This waiting period cannot be more than 6 months. 1040 nr ez Exclusion from wages. 1040 nr ez   You can generally exclude the cost of up to $50,000 of group-term life insurance from the wages of an insured employee. 1040 nr ez You can exclude the same amount from the employee's wages when figuring social security and Medicare taxes. 1040 nr ez In addition, you do not have to withhold federal income tax or pay FUTA tax on any group-term life insurance you provide to an employee. 1040 nr ez Coverage over the limit. 1040 nr ez   You must include in your employee's wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance. 1040 nr ez Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. 1040 nr ez Also, show it in box 12 with code “C. 1040 nr ez ” The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax. 1040 nr ez   Figure the monthly cost of the insurance to include in the employee's wages by multiplying the number of thousands of dollars of all insurance coverage over $50,000 (figured to the nearest $100) by the cost shown in Table 2-2. 1040 nr ez For all coverage provided within the calendar year, use the employee's age on the last day of the employee's tax year. 1040 nr ez You must prorate the cost from the table if less than a full month of coverage is involved. 1040 nr ez Table 2-2. 1040 nr ez Cost Per $1,000 of Protection For 1 Month Age Cost Under 25 $ . 1040 nr ez 05 25 through 29 . 1040 nr ez 06 30 through 34 . 1040 nr ez 08 35 through 39 . 1040 nr ez 09 40 through 44 . 1040 nr ez 10 45 through 49 . 1040 nr ez 15 50 through 54 . 1040 nr ez 23 55 through 59 . 1040 nr ez 43 60 through 64 . 1040 nr ez 66 65 through 69 1. 1040 nr ez 27 70 and older 2. 1040 nr ez 06 You figure the total cost to include in the employee's wages by multiplying the monthly cost by the number of full months' coverage at that cost. 1040 nr ez Example. 1040 nr ez Tom's employer provides him with group-term life insurance coverage of $200,000. 1040 nr ez Tom is 45 years old, is not a key employee, and pays $100 per year toward the cost of the insurance. 1040 nr ez Tom's employer must include $170 in his wages. 1040 nr ez The $200,000 of insurance coverage is reduced by $50,000. 1040 nr ez The yearly cost of $150,000 of coverage is $270 ($. 1040 nr ez 15 x 150 x 12), and is reduced by the $100 Tom pays for the insurance. 1040 nr ez The employer includes $170 in boxes 1, 3, and 5 of Tom's Form W-2. 1040 nr ez The employer also enters $170 in box 12 with code “C. 1040 nr ez ” Coverage for dependents. 1040 nr ez   Group-term life insurance coverage paid by the employer for the spouse or dependents of an employee may be excludable from income as a de minimis fringe benefit if the face amount is not more than $2,000. 1040 nr ez If the face amount is greater than $2,000, the entire cost of the dependent coverage must be included in income unless the amount over $2,000 is purchased with employee contributions on an after-tax basis. 1040 nr ez The cost of the insurance is determined by using Table 2-2. 1040 nr ez Former employees. 1040 nr ez   When group-term life insurance over $50,000 is provided to an employee (including retirees) after his or her termination, the employee share of social security and Medicare taxes on that period of coverage is paid by the former employee with his or her tax return and is not collected by the employer. 1040 nr ez You are not required to collect those taxes. 1040 nr ez Use the table above to determine the amount of social security and Medicare taxes owed by the former employee for coverage provided after separation from service. 1040 nr ez Report those uncollected amounts separately in box 12 of Form W-2 using codes “M” and “N. 1040 nr ez ” See the General Instructions for Forms W-2 and W-3 and the Instructions for Form 941. 1040 nr ez Exception for key employees. 1040 nr ez   Generally, if your group-term life insurance plan favors key employees as to participation or benefits, you must include the entire cost of the insurance in your key employees' wages. 1040 nr ez This exception generally does not apply to church plans. 1040 nr ez When figuring social security and Medicare taxes, you must also include the entire cost in the employees' wages. 1040 nr ez Include the cost in boxes 1, 3, and 5 of Form W-2. 1040 nr ez However, you do not have to withhold federal income tax or pay FUTA tax on the cost of any group-term life insurance you provide to an employee. 1040 nr ez   For this purpose, the cost of the insurance is the greater of the following amounts. 1040 nr ez The premiums you pay for the employee's insurance. 1040 nr ez See Regulations section 1. 1040 nr ez 79-4T(Q&A 6) for more information. 1040 nr ez The cost you figure using Table 2-2. 1040 nr ez   For this exclusion, a key employee during 2014 is an employee or former employee who is one of the following individuals. 1040 nr ez See section 416(i) of the Internal Revenue Code for more information. 1040 nr ez An officer having annual pay of more than $170,000. 1040 nr ez An individual who for 2014 was either of the following. 1040 nr ez A 5% owner of your business. 1040 nr ez A 1% owner of your business whose annual pay was more than $150,000. 1040 nr ez   A former employee who was a key employee upon retirement or separation from service is also a key employee. 1040 nr ez   Your plan does not favor key employees as to participation if at least one of the following is true. 1040 nr ez It benefits at least 70% of your employees. 1040 nr ez At least 85% of the participating employees are not key employees. 1040 nr ez It benefits employees who qualify under a set of rules you set up that do not favor key employees. 1040 nr ez   Your plan meets this participation test if it is part of a cafeteria plan (discussed in section 1) and it meets the participation test for those plans. 1040 nr ez   When applying this test, do not consider employees who: Have not completed 3 years of service, Are part-time or seasonal, Are nonresident aliens who receive no U. 1040 nr ez S. 1040 nr ez source earned income from you, or Are not included in the plan but are in a unit of employees covered by a collective bargaining agreement, if the benefits provided under the plan were the subject of good-faith bargaining between you and employee representatives. 1040 nr ez   Your plan does not favor key employees as to benefits if all benefits available to participating key employees are also available to all other participating employees. 1040 nr ez Your plan does not favor key employees just because the amount of insurance you provide to your employees is uniformly related to their pay. 1040 nr ez S corporation shareholders. 1040 nr ez   Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the cost of all group-term life insurance coverage you provide the 2% shareholder in his or her wages. 1040 nr ez When figuring social security and Medicare taxes, you must also include the cost of this coverage in the 2% shareholder's wages. 1040 nr ez Include the cost in boxes 1, 3, and 5 of Form W-2. 1040 nr ez However, you do not have to withhold federal income tax or pay federal unemployment tax on the cost of any group-term life insurance coverage you provide to the 2% shareholder. 1040 nr ez Health Savings Accounts A Health Savings Account (HSA) is an account owned by a qualified individual who is generally your employee or former employee. 1040 nr ez Any contributions that you make to an HSA become the employee's property and cannot be withdrawn by you. 1040 nr ez Contributions to the account are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. 1040 nr ez The medical expenses must not be reimbursable by insurance or other sources and their payment from HSA funds (distribution) will not give rise to a medical expense deduction on the individual's federal income tax return. 1040 nr ez For more information about HSAs, visit the Department of Treasury's website at www. 1040 nr ez treasury. 1040 nr ez gov and enter “HSA” in the search box. 1040 nr ez Eligibility. 1040 nr ez   A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance except for permitted insurance listed under section 223(c)(3) or insurance for accidents, disability, dental care, vision care, or long-term care. 1040 nr ez For calendar year 2014, a qualifying HDHP must have a deductible of at least $1,250 for self-only coverage or $2,500 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $6,350 for self-only coverage and $12,700 for family coverage. 1040 nr ez   There are no income limits that restrict an individual's eligibility to contribute to an HSA nor is there a requirement that the account owner have earned income to make a contribution. 1040 nr ez Exceptions. 1040 nr ez   An individual is not a qualified individual if he or she can be claimed as a dependent on another person's tax return. 1040 nr ez Also, an employee's participation in a health flexible spending arrangement (FSA) or health reimbursement arrangement (HRA) generally disqualifies the individual (and employer) from making contributions to his or her HSA. 1040 nr ez However, an individual may qualify to participate in an HSA if he or she is participating in only a limited-purpose FSA or HRA or a post-deductible FSA. 1040 nr ez For more information, see Other employee health plans in Publication 969. 1040 nr ez Employer contributions. 1040 nr ez   Up to specified dollar limits, cash contributions to the HSA of a qualified individual (determined monthly) are exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. 1040 nr ez For 2014, you can contribute up to $3,300 for self-only coverage or $6,550 for family coverage to a qualified individual's HSA. 1040 nr ez   The contribution amounts listed above are increased by $1,000 for a qualified individual who is age 55 or older at any time during the year. 1040 nr ez For two qualified individuals who are married to each other and who each are age 55 or older at any time during the year, each spouse's contribution limit is increased by $1,000 provided each spouse has a separate HSA. 1040 nr ez No contributions can be made to an individual's HSA after he or she becomes enrolled in Medicare Part A or Part B. 1040 nr ez Nondiscrimination rules. 1040 nr ez    Your contribution amount to an employee's HSA must be comparable for all employees who have comparable coverage during the same period. 1040 nr ez Otherwise, there will be an excise tax equal to 35% of the amount you contributed to all employees' HSAs. 1040 nr ez   For guidance on employer comparable contributions to HSAs under section 4980G in instances where an employee has not established an HSA by December 31 and in instances where an employer accelerates contributions for the calendar year for employees who have incurred qualified medical expenses, see Regulations section 54. 1040 nr ez 4980G-4. 1040 nr ez Exception. 1040 nr ez   The Tax Relief and Health Care Act of 2006 allows employers to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee. 1040 nr ez A highly compensated employee for 2014 is an employee who meets either of the following tests. 1040 nr ez The employee was a 5% owner at any time during the year or the preceding year. 1040 nr ez The employee received more than $115,000 in pay for the preceding year. 1040 nr ez You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. 1040 nr ez Partnerships and S corporations. 1040 nr ez   Partners and 2% shareholders of an S corporation are not eligible for salary reduction (pre-tax) contributions to an HSA. 1040 nr ez Employer contributions to the HSA of a bona fide partner or 2% shareholder are treated as distributions or guaranteed payments as determined by the facts and circumstances. 1040 nr ez Cafeteria plans. 1040 nr ez   You may contribute to an employee's HSA using a cafeteria plan and your contributions are not subject to the statutory comparability rules. 1040 nr ez However, cafeteria plan nondiscrimination rules still apply. 1040 nr ez For example, contributions under a cafeteria plan to employee HSAs cannot be greater for higher-paid employees than they are for lower-paid employees. 1040 nr ez Contributions that favor lower-paid employees are not prohibited. 1040 nr ez Reporting requirements. 1040 nr ez   You must report your contributions to an employee's HSA in box 12 of Form W-2 using code “W. 1040 nr ez ” The trustee or custodian of the HSA, generally a bank or insurance company, reports distributions from the HSA using Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. 1040 nr ez Lodging on Your Business Premises You can exclude the value of lodging you furnish to an employee from the employee's wages if it meets the following tests. 1040 nr ez It is furnished on your business premises. 1040 nr ez It is furnished for your convenience. 1040 nr ez The employee must accept it as a condition of employment. 1040 nr ez Different tests may apply to lodging furnished by educational institutions. 1040 nr ez See section 119(d) of the Internal Revenue Code for details. 1040 nr ez The exclusion does not apply if you allow your employee to choose to receive additional pay instead of lodging. 1040 nr ez On your business premises. 1040 nr ez   For this exclusion, your business premises is generally your employee's place of work. 1040 nr ez For special rules that apply to lodging furnished in a camp located in a foreign country, see section 119(c) of the Internal Revenue Code and its regulations. 1040 nr ez For your convenience. 1040 nr ez   Whether or not you furnish lodging for your convenience as an employer depends on all the facts and circumstances. 1040 nr ez You furnish the lodging to your employee for your convenience if you do this for a substantial business reason other than to provide the employee with additional pay. 1040 nr ez This is true even if a law or an employment contract provides that the lodging is furnished as pay. 1040 nr ez However, a written statement that the lodging is furnished for your convenience is not sufficient. 1040 nr ez Condition of employment. 1040 nr ez   Lodging meets this test if you require your employees to accept the lodging because they need to live on your business premises to be able to properly perform their duties. 1040 nr ez Examples include employees who must be available at all times and employees who could not perform their required duties without being furnished the lodging. 1040 nr ez   It does not matter whether you must furnish the lodging as pay under the terms of an employment contract or a law fixing the terms of employment. 1040 nr ez Example. 1040 nr ez A hospital gives Joan, an employee of the hospital, the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance in addition to her regular salary. 1040 nr ez If Joan chooses to live at the hospital, the hospital cannot exclude the value of the lodging from her wages because she is not required to live at the hospital to properly perform the duties of her employment. 1040 nr ez S corporation shareholders. 1040 nr ez   For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. 1040 nr ez A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. 1040 nr ez Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. 1040 nr ez Meals This section discusses the exclusion rules that apply to de minimis meals and meals on your business premises. 1040 nr ez De Minimis Meals You can exclude any occasional meal or meal money you provide to an employee if it has so little value (taking into account how frequently you provide meals to your employees) that accounting for it would be unreasonable or administratively impracticable. 1040 nr ez The exclusion applies, for example, to the following items. 1040 nr ez Coffee, doughnuts, or soft drinks. 1040 nr ez Occasional meals or meal money provided to enable an employee to work overtime. 1040 nr ez However, the exclusion does not apply to meal money figured on the basis of hours worked. 1040 nr ez Occasional parties or picnics for employees and their guests. 1040 nr ez This exclusion also applies to meals you provide at an employer-operated eating facility for employees if the annual revenue from the facility equals or exceeds the direct costs of the facility. 1040 nr ez For this purpose, your revenue from providing a meal is considered equal to the facility's direct operating costs to provide that meal if its value can be excluded from an employee's wages as explained under Meals on Your Business Premises , later. 1040 nr ez If food or beverages you furnish to employees qualify as a de minimis benefit, you can deduct their full cost. 1040 nr ez The 50% limit on deductions for the cost of meals does not apply. 1040 nr ez The deduction limit on meals is discussed in chapter 2 of Publication 535. 1040 nr ez Employee. 1040 nr ez   For this exclusion, treat any recipient of a de minimis meal as

Topic 506 - Charitable Contributions

Charitable contributions are deductible only if you itemize deductions on Form 1040, Schedule A (PDF).

To be deductible, charitable contributions must be made to qualified organizations. Payments to individuals are never deductible. See Publication 526, Charitable Contributions. To determine if the organization that you have contributed to qualifies as a charitable organization for income tax deductions, review Exempt Organizations Select Check on the IRS.gov website.

If your contribution entitles you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.

For a contribution of cash, check, or other monetary gift (regardless of amount), you must maintain as a record of the contribution a bank record or a written communication from the qualified organization containing the name of the organization, the date of the contribution, and the amount of the contribution. In addition to deducting your cash contributions, you generally can deduct the fair market value of any other property you donate to qualified organizations. See Publication 561, Determining the Value of Donated Property. For any contribution of $250 or more (including contributions of cash or property), you must obtain and keep in your records a contemporaneous written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services. One document from the qualified organization may satisfy both the written communication requirement for monetary gifts and the contemporaneous written acknowledgment requirement for all contributions of $250 or more.

You must fill out Form 8283 (PDF), and attach it to your return, if your deduction for a noncash contribution is more than $500. If you claim a deduction for a contribution of noncash property worth $5,000 or less, you must fill out Form 8283, Section A. If you claim a deduction for a contribution of noncash property worth more than $5,000, you will need a qualified appraisal of the noncash property and must fill out Form 8283, Section B. If you claim a deduction for a contribution of noncash property worth more than $500,000, you also will need to attach the qualified appraisal to your return.

Special rules apply to donations of certain types of property such as automobiles, inventory and investments that have appreciated in value. For more information, refer to Publication 526, Charitable Contributions. For information on determining the value of your noncash contributions, refer to Publication 561, Determining the Value of Donated Property.

Page Last Reviewed or Updated: December 12, 2013

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