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Railroad Retirement Tax Act (RRTA) Desk Guide (January 2009)

LMSB-4-0908-048

1. Preface

  • Ground Transportation Technical Advisor

2.  Introduction

  • Role of RRB

The Railroad Retirement Systems

Types of Tax

  • RRTA - Tiers and Rates

Filing Requirements, IRS
  • Forms
  • Form CT-
  • Form CT-2
  • Form 941
  • Form W-2
  • Form W-3

Filing Requirements, RRB
  • RRB Reports

Deposit Requirements

3.  Interaction Between IRS and RRB

  • Memorandum of Understanding (Coordination and Implementation Agreements)
  • On-site Information Exchange
  • IRS Reports
  • RRB Determination of Coverage
  • RRB Audit Report
  • IRS Follow-up

4.  Definitions

Employer

  • RRA vs. RRTA
  • Employer
  • Owned Company
  • Controlled Companies
  • Stock Ownership
  • Licenses
  • Agreements
  • Any Railroad Service
  • Indirect Services
  • Indirect
  • Companies
  • Casual Service
  • Receiver or Trustee as Employer
  • Railroad Associations
  • Railway Labor Organizations
  • Exclusions From "Employer"

Employee

  • In the Service of One or More Employers
  • Officer
  • Special Categories
  • Exclusions

Compensation

  • Comparison of RRTA to FICA
  • Included and Excluded
  • Earned vs. Paid

5.  Audit Techniques

Audit Plan

  • Preliminary
  • Payroll System
  • Computer Audit Specialist (CAS) Applications
  • Reconciliation of CT-1's
  • Supplemental Annuity Tax
  • RURT
  • Fringe Benefits
  • Backup Withholding
  • Conversion Issues
  • FICA vs. RRTA.

6.  Potential Issues

General

  • General Comments
  • Employee vs. Independent Contractor
  • Section 530
  • General Issues

Industry Specific Issues:

  • Severance Pay/ Termination Pay
  • Annual Productivity Fund Payments
  • Productivity Fund Buyouts
  • Employee Achievement Awards
  • Housing Allowances
  • Meals, Travel, Lodging
  • SEGREGATION
  • Excluded Companies
  • Principally Engaged in Railroad Activities
  • Separate, Identifiable Enterprise
  • Court Cases

Employer Issues

  • Common Paymaster
  • Successor Employers

Related Corporations:

  • Car Repair Shops
  • Warehousing and Warehouse Companies
  • Construction Companies
  • Real Estate Companies
  • Data Processing Companies

Examination Techniques, Related Corporations

  • Subsidiary Records
  • Parent Records
  • Contractual Relationship
  • General Inquiries
  • Other Considerations

7.  Report Writing

  • General
  • ET Version 8.0
  • Form 4665, Form 4666, Form 886A, Form 2504, Form 2297, Form 3363
  • Form 4668-RT
  • Form 4667
  • Conversion Case
  • IRC § 3509

Computation of Tax

  • Tier I 
  • Tier II

8.  Other Considerations

  • Statutory Period of Limitations
  • Form SS-1O
  • RRB Report Title
  • BA-3a Annual Report of Creditable Compensation
  • BA-4 Report of Creditable Compensation Adjustments
  • BA-9 Report of Separation Allowance or Severance Pay
  • BA-10 Report of Miscellaneous Compensation and Sick Pay
  • Form G-241 Summary Statement of Quarterly Report of Railroad Retirement
  • Supplemental Annuity Tax Liabilities
  • Form G-245 Summary Statement of Quarterly Report of Railroad Retirement
  • Supplemental Tax Credits
  • Form G-440 Report Specifications Sheet
  • Penalties, Interest Free Adjustments, Abatements


1.  Preface

This Desk Reference Guide is intended as a resource tool to assist Revenue Agents who are assigned the examination of a railroad employer. The Guide was prepared presuming that the reader has already received employment tax training. The guide will provide:

  • An overview of the Railroad Retirement System.
  • An explanation of the role of the Railroad Retirement Board (RRB).
  • An explanation of the interaction of the IRS and the RRB.
  • Definitions specific to railroad retirement terminology.
  • A suggested audit plan.
  • A list of potential issues with possible position write-ups.

We have attempted to include as many citations as possible throughout the text to relevant court cases, revenue rulings, revenue procedures, private letter rulings, etc.

Ground Transportation Technical Advisor
Technical Advisors assist the field in identifying, developing and resolving industry specific and cross-industry issues; provide educational opportunities to internal and external customers as appropriate; and maintain and develop industry and issue expertise. The Ground Transportation  Technical Advisor (TA) provides these services for the railroad and trucking industries. The TA maintains a liaison with various functions within the IRS as well as in other governmental agencies, and may also be aware of issues being raised at various other examination sites throughout the country.  As a result, the TA may be able to provide the examiner with current information to consider during the course of the audit.

The TA also maintains a web site at: http://lmsb.irs.gov/hq/pftg/railroad/index.asp

This web site may be useful in obtaining information on topics of an even more current nature The railroad industry is unique in many ways and we encourage examiners to use the web site as a means of obtaining knowledge and understanding about the industry.

It is recommended that the examiner use four hours to review the guide during the planning stages of the examination. The guide can then be used on a continuing basis during the course of the examination as a reference tool.

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2.  Introduction

Railroad employers are subject to a separate and distinct system of employment taxes from the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) systems covering most other employers.  Parts of the system are the responsibility of the IRS, and parts of the system are the responsibility of the Railroad Retirement Board, an independent governmental agency.

Because this is a separate system for railroad employers, payments subject to railroad retirement taxes are specifically excepted from FICA, FUTA, and the Self-Employment Contributions Act (SECA).

The Railroad Retirement Board (RRB) is an independent agency in the executive branch of the Federal Government.  The RRB is headed by a three member Board appointed by the President of the United States, with the advice and consent of the Senate.  One member is appointed upon the recommendation of railroad employers, one is appointed upon the recommendation of railroad labor organizations, and the third member, who is the Chairman, is appointed to represent the public interest.  The Board Members' terms of office are five years, and are scheduled to expire in different years.

The primary function of the Board is the determination and payment of benefits under the retirement-survivor and unemployment-sickness programs. To this end, the Board employs field representatives to assist railroad personnel and their families in filing claims for benefits, examiners to adjudicate the claims, and information technology staff to operate the data processing equipment and administer the automated programs needed to maintain earnings records, calculate benefits and process payments.

The Board also employs actuaries to predict the future income and outlays of the railroad retirement trust funds, statisticians and economists to provide vital data, and attorneys to interpret legislation and represent the Board in litigation. Internal administration requires a procurement staff, a budget and accounting staff, and personnel specialists. The Inspector General employs auditors and investigators to detect any waste, fraud or abuse in the benefit programs.

The Board's headquarters is located in Chicago, Illinois.  The Board maintains field offices across the United States in localities easily accessible to large numbers of railroad workers.

Role of RRB
The role of the RRB is to administer the benefits of the Railroad Retirement Act (RRA) and Railroad Unemployment Insurance Act (RUIA) systems. Thus, the RRB maintains earnings records for each railroad employee in a manner similar to those maintained by the Social Security Administration.   The RRB’s relationship with the Social Security Administration (SSA) is particularly extensive because of the coordination between the two systems.  Railroad retirement annuities may be based in part on social security credits and social security benefit amounts awarded after 1974 to railroad retirement annuitants are made through the Board as part of combined railroad retirement-social security monthly benefit payments.

The RRB and the Social Security Administration have an interagency agreement providing for system-to-system access between the two agencies.
 
The Railroad Retirement System
Railroad employment taxes consist of employer and employee taxes. The employer and employees pay certain taxes at different rates and some are only paid by one or the other, though all taxes are collected by the employer and the employer makes deposits of these taxes.

  1. Railroad Retirement Tax Act (RRTA) – RRTA taxes fund railroad worker retirement benefits.  Collection of these taxes is the responsibility of the IRS.  These taxes are imposed by chapter 22 of the Internal Revenue Code (IRC).
  2. Railroad Retirement Act (RRA) – RRA is the benefit system through which payments are made to retired railroad workers. Benefits are administered by the RRB.
  3. Railroad Unemployment Insurance Act (RUIA) - This system provides unemployment and sickness insurance benefit program for railroad workers. The system is administered, and the taxes are collected by, the RRB.
  4. Railroad Unemployment Repayment Tax (RURT) - in periods of economic downturn, when the RUIA account becomes insufficient to cover payments of unemployment benefits, funds are advanced to the RUIA account from the RRTA account.  RURT taxes are then collected as a means of repaying the advance, bringing the RUIA fund back into balance.  Thus, this tax goes into and out of effect, depending on the balance in the RUIA account.

    As of June 29, 1993, the RUIA account was fully funded and all advances from the RRTA account had been repaid.  As a result, the RURT was terminated effective with respect to wages paid on or after July 1, 1993.  This tax could be reinstated at some future date.  When in effect this tax is imposed by Chapter 23A of the IRC.
  5. Tax on Employee Representatives - Certain individuals perform services as an officer or official representative of a railway labor organization for purposes of representing employees under the Railway Labor Act.  These individuals are subject to RRTA taxes, and file a separate return to report the wage payments and RRTA taxes. Individuals subject to this tax will not be covered in detail in this desk guide due to the limited number of returns filed for this special situation.  Discussion of employee representatives will be limited to an awareness only basis.
  6. IRC 6103 (l) (1) (C) - The IRS is authorized to disclose tax information regarding RRTA taxes to the RRB for purposes of its administration of the RRA.  The RRB may not use such tax information to administer any other statutes.  Such tax information may not be disclosed to RRB contractors (in connection with the administration of the RRA).  The IRS may not disclose RURT information to the RRB.

RRTA – Tiers and Rates
Legislation was enacted in 1934, 1935, and 1937 to establish a railroad retirement system separate from the Social Security Act of 1935.  Under Railroad Retirement provisions, service was credited back to 1936 and rail workers received a somewhat higher benefit than they would have under Social Security.  Additional legislation passed in 1974 restructured railroad retirement benefits into two tiers to coordinate them more fully with social security benefits. 

Railroad retirement replaces the social security system for railroad workers. The taxes under the railroad retirement system are included in two tiers.  The first tier is based on combined railroad retirement and social security credits, using social security benefit formulas.  The second tier is based on railroad service only and is comparable to the pensions paid over and above social security benefits in other heavy industries.  These tiers and rates are as follows:

RRTA

2008

2007

2006

Tier I Wage Base/Rate *

$102,000/6.20%

$97,500/6.20%

$94,200/6.20%

Tier I Wage Base/Rate *

unlimited/1.45%

unlimited/1.45%

unlimited/1.45%

Tier II ER Wage Base/Rate

$75,900/12.1%

$72,600/12.1%

$69,900/12.6%

Tier II EE Wage Base/Rate

$75,900/3.9%

$72,600/3.9%

$69,900/4.4%

* Subject to both employer and employee

 

 


When looking at the rates for RRTA, and comparing them to the rates used for social security, it is readily apparent that a railroad employer is subject to a much higher rate of tax than a non-railroad employer.  Thus, there is a significant incentive for an employer to attempt to be classified as a non-railroad, to classify workers as independent contractors, or to classify payments as something other than wages.
 
Filing Requirements, IRS

Forms

Because railroad employers do not come under the social security system, they file different employment tax returns from those used to report FICA wages.

The forms used to report railroad employment taxes are presented below.

Form CT-1

Employer's Annual Railroad Retirement Tax Return

A railroad employer files an annual CT-1 to report RRTA taxes.  All CT-1 returns are filed with the IRS Cincinnati Campus, and must be filed by the last day of the second month following the end of the calendar year (normally, by February 28th).

The IRS Cincinnati Campus provides information to the RRB to allow the RRB to reconcile railroad employer accounts.

Note: For any year in which the RURT is applicable, a separate entry is provided in order for the RURT to be reported on the Form CT-1.

Form CT-2

Employee Representative's Quarterly Railroad Tax Return

A CT-2 is filed on a quarterly basis by individuals subject to the Tax on Employee Representatives.

Form 941

Employer’s Quarterly Federal Tax Return

Although railroad employers are not subject to FICA, they are still required to withhold income tax on behalf of their railroad employees; there is no provision on Form CT-l to report the income tax withholding, so railroad employers use Form 941 for this purpose.

It is also conceivable that an employer could have some employees covered by FICA, and other employees covered by RRTA. In this situation the employer would be reporting FICA wages on the Form 941.  (This subject will be discussed in greater detail in the “Potential Issues” section of the guide.)

Form W-2

Wage and Tax Statement

Railroad employers use Form W-2 to report wage payments to employees and to SSA.  RRTA taxes are shown in Box 14, and Boxes 3, 4, 5, 6 and 7, relating to FICA and Medicare, should be blank.

Form W-3

Transmittal of Income and Tax Statements

Railroad employers use Form W-3 to transmit Forms W-2 to SSA.  Form W-3 provides a box to indicate that the employer is a railroad, alerting SSA to the fact that the information reported reflects RRTA rather than FICA and Medicare.

If an employer has some employees covered under FICA and Medicare as well as RRTA, the Form W-2's must be segregated by type, and separate Forms  W-3 prepared for each batch.

Filing Requirements, RRB

RRB Reports

A railroad employer is also required to submit numerous reports to the RRB which can be used by the examiner as a cross check of the amounts reported on the Form CT-1. Some of the reports are as follows:

RRB Report

Title

BA-3a

Annual Report of Creditable Compensation

BA-4

Report of Creditable Compensation Adjustments

BA-9

Report of Separation Allowance or Severance Pay

BA-10

Report of Miscellaneous Compensation and Sick Pay

Form G-241

Summary Statement of Quarterly Report of Railroad Retirement Supplemental Annuity Tax Liabilities

Form G-245

Summary Statement of Quarterly Report of Railroad Retirement Supplemental Tax Credits

Form G-440

Report Specifications Sheet

Deposit Requirements

Railroads are under the same rules as any other business or employer for determining deposit requirements for all types of tax.  RRTA taxes are also subject to deposit requirements.  The “Instructions for Form CT-1”, contain a detailed discussion of deposit rules for RRTA taxes. There were major changes made to the deposit requirements in 1999.  See News Release IR-1999-27 and Notice 99-20, 1999-17 I.R.B. 16.

In general RRTA taxes are deposited with an authorized financial institution or a Federal Reserve Bank by using Form 8109, Federal Tax Deposit Coupon.  Based on a dollar threshold there is a mandatory electronic deposit requirement.  That threshold has been increased from $50,000 to $200,000. If the total Federal tax deposits made in 2006 exceed $200,000 they must use the Electronic Federal Tax Payment System (EFTPS) or RRBLINK beginning January 1,2007.   

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3.  Interaction Between IRS and RRB

Agreement Between the Railroad Retirement Board and Internal Revenue Service

The Agreement between the Railroad Retirement Board and Internal Revenue Service (Agreement)  facilitates the sharing of information between the two agencies.

The terms of the Agreement call for each agency to share the results of its investigations with the other agency and to provide supporting work papers or documentation on an as needed basis, to the extent authorized under IRC § 6103(l)(1)(c) and other applicable federal laws.

On-site Information Exchange

On occasion, the IRS and RRB may be simultaneously involved in an audit of the same employer.  In such an event, each agency may share information with the other as permitted by applicable federal laws.  The LMSB Ground Transportation Technical Advisor should be contacted before any information is shared

IRS Reports

The Agreement calls for the IRS to furnish a copy of any examination report to the RRB.  For an agreed case, the report is furnished when the examiner is closing the case. Unagreed reports are furnished after Appeals action.

It is important to note that the RRB is NOT entitled to receive any information with respect to RURT taxes and/or social security taxes. If an examination results in changes to RURT and/or social security taxes, the report should be sanitized so that RURT and/or social security information is not included in the copy being provided to the RRB.  Such sanitizing should be coordinated with the local IRS disclosure officer.
 
RRB Determination of Coverage

The RRB conducts investigations with regard to whether or not an employer is an RRA employer, the results of which are referred to as determinations of coverage.

The RRB employs a legal staff charged with the responsibility of submitting a recommendation to the Board concerning questions of coverage.  The Board then makes the final determination of coverage after analyzing the recommendation of legal counsel.

The results of a determination of coverage can fall into three categories, and are forwarded to the IRS for appropriate action, as shown below.

Note that while the Board makes the determination of coverage, the IRS must conduct any follow-up action since the assessment and collection of applicable RRTA taxes are the responsibility of the IRS.

RRB Audit Report

The RRB also conducts audits of existing RRA employers.  During the course of such audits, the RRB may identify compensation that is not being reported as wages for RRTA purposes. The RRB forwards a copy of its report to the IRS for follow-up since the IRS is responsible for the assessment and collection of applicable RRTA taxes.

IRS Follow-up

With regard to both determinations of coverage and RRB audit reports, the IRS must decide what action is appropriate relative to assessment and collection of RRTA. This decision should take into account the relative size of the potential adjustment, the year(s) involved, other workload priorities, etc.

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4.  Definitions

Employer  RRA vs. RRTA

RRTA, RRA and RUIA each contain a definition of the term "employer". The IRS has endorsed the policy of construing and applying the term "employer" for RRTA purposes in the same manner as that term is construed and applied for RRA and RUIA purposes.  See Rev. Rul. 77-445, 1977-2 C.B. 357 and Rev. Rul. 74-121, 1974-1 C.B. 300.  See also City of Galveston by and Through Board of Trustees v. United States, 33 Fed. Cl. 685 (1995); Standard Office Bldg. Corp. v. United States, 819 F.2d 1371 (7th Cir. Ill. 1987); Galveston by and Through Board of Trustees v. United States, 22 Cl. Ct. 600 (1991); Carland, Inc. v. United States, 75 A.F.T.R.2d 1234 (W.D. Mo. 1995).

Employer

A RRTA "employer" is a railroad carrier or any company that: (1) is "directly or indirectly owned or controlled by" a railroad carrier or is "under common control" with such a carrier; and (2) "operates any equipment or facility or performs any service (except trucking service, casual service, and the casual operation of equipment or facilities) in connection with the transportation of passengers or property by railroad, or the receipt, delivery, elevation, transfer in transit, refrigeration or icing, storage, or handling of property transported by railroad. (see  IRC § 3231(a))

Owned Company

The Surface Transportation Board requires companies involved in the transportation industry to file reports and to list in these reports all affiliated companies.  These reports provide information regarding the principal business activity, the form of control, the percentage of control, along with information regarding any other company that may own a portion of the affiliated company.  Any company listed in these schedules will generally be railroad employers set out in Treas. Reg. § 31.3231(a)-1.

Controlled Companies

Companies that perform railroad service and are controlled by one or more carriers are employers.  Control may be by means of:

  • Stock ownership
  • Agreements
  • Licenses.
  • Any other devices which insure that the operation of the company is in the   interest of one or more carriers

Stock Ownership

If this is the form of control used, then the examiner should be able to show that a majority of the stock owners are also stock owners of one or more companies that control a carrier.  The examiner should request from the controlled company a list of their stock owners and other companies that they own stock in.

Licenses

If this is the form of control used, then the examiner should be able to show that the licensor of the controlled company has the same licenses with those of one or more companies that control a carrier.

Agreements

This means of control may be present through a contract or agreement. For example, when a carrier enters into a cost plus contract, the carrier may step in and control management action to prevent cost overruns. Another example of this means of control may occur when the right to control is set out in an agreement even though the company is designated as an independent contractor. Look for a separate agreement, like a union agreement, that simply states that the carrier will maintain the control necessary to determine whether workers are employees. Also a contract or agreement may spell out the control over the manner and method of accomplishing results. Such control may be found in an addendum to the contract or in the form of general specifications which set out the results and the manner and method of accomplishing the results.

The examiner is looking for a situation in which a result could be accomplished by one or more different methods. When the contract spells out the results to be achieved, as well as the method of accomplishing that result, the company is not free to use its own method, and is controlled.

Any Railroad Service

In addition to being owned or controlled, a company must also be performing a railroad service.  The service may be direct or indirect.

Direct Services

Direct services are those that involve the transportation by rail of:

  • Passengers
  • Property

Indirect Services

Indirect services involve those that are connected with, or supportive of rail transportation and/or essential to its proper functioning, but which are not casual or trucking services. The following list represents examples of services that are included in indirect services:

  • Accounting services
  • Bookkeeping
  • Bridge services
  • Building services
  • Construction
  • Engineering
  • Equipment leasing and rental
  • Loading and unloading freight
  • Maintenance of way
  • Office building rental
  • Piggyback trailer ramping, deramping and repair
  • Purchasing department
  • Repair services
  • Servicing overhead trolley lines
  • Stenographic services

Listed below are the kinds of companies that may provide indirect services:

  • Communications Company - Look for those that use microwave relays such as TV antenna (Cable TV) companies or other companies that may handle the railroad's communication, signal, and switching operations.
  • Computer Company - Look for those owned by a carrier that are performing accounting services or use computers to operate signals, keep track of shipments, rolling stock; and other rail activities. See Revenue Ruling 77-445, 1977-2 C.B. 357.  See also City of Galveston by and Through Board of Trustees v. United States, 33 Fed. Cl. 685 (1995); Galveston by and Through Board of Trustees v. United States, 22 Cl.Ct. 600 (1991).
  • Concrete Company - Look for those that pour pre-stressed concrete.  Check to see if they make concrete cross ties.
  • Dock Company - Look for all types of terminal companies, including potential subdivisions of a state such as port authorities which may also be subject to RRTA tax. See Revenue Ruling 77-386, 1977-2 C.B. 356 and Revenue Ruling 82-64, 1982-1 C.B. 154.
  • Financial Companies - Look for those that own or lease rolling stock.
  • Fuel Companies - Check to see if they are fueling, heating, or cooling units on cars or piggyback trailers. See Revenue Ruling 74-552, 1974-2 C.B. 338.  But See Missouri Pacific Lines, Inc. v. United States, 3 Cl. Ct. 14 (1983).
  • Gravel Companies – Look for those that furnish ballast including crushed slag.
  • Ice Companies - Icing boxcars generally have been replaced by refrigerator cars but sometimes ice companies fuel these cars. Revenue Ruling 69-306 1969-1 C.B. 267.
  • Lumber Companies - Look for those that furnish railroad ties or plywood cut to fit in railroad boxcars.
  • Manufacturing Companies - Look for those owned by a carrier that manufacture or remanufacture railroad pans, accessories, or other equipment used by a carrier. See Revenue Ruling 85-177, 1985-2 C.B. 203.  See also Trans-Serve, Inc. v. United States, 521 F.3d 462 (5th Cir. 2008).
  • Real Estate Company - Look for those owned by a carrier that own office buildings, warehouses, terminal tracks, and furnish or lease these to or on behalf of the railroad. See Revenue Ruling 74-121, 1974-1 C.B. 300.  See also Standard Office Bldg. Corp. v. United States, 819 F.2d 1371 (7th Cir. Ill. 1987); Carland, Inc. v. United States, 75 A.F.T.R.2d 1234 (W.D. Mo. 1995).
  • Steel Companies - Look for those that repair or build rolling stock. See Despatch Shops, Inc. v. Railroad Retirement Board, 153 F.2d 644 (D.C. Cir. 1946) regarding RUIA and Despatch Shops v. Railroad Retirement Board, 154 F.2d 417 (2d Cir. 1946) regarding RRA.
  • Warehouse Company - Look at each of these very carefully. Include any produce terminal company buildings, grain elevators, etc.

Casual Service

Treas. Reg. § 31.3231(a)-1(c) states that:

"... the term casual applies when the service rendered or the operation of equipment or facilities by a controlled company or person in connection with the transportation of passengers or property by railroad is so irregular or infrequent as to afford no substantial basis for an inference that such service or operation will be repeated, or whenever such service or operation is insubstantial."

The RRB regulations define “casual service” essentially the same: “…whenever such service or operation is so irregular or infrequent as to afford no substantial basis for an inference that such service or operation will be repeated, or whenever such service or operation is insubstantial.”  As a guideline in applying the definition of “insubstantial”, the RRB uses less than 10 percent of total revenue, employees, and output. This guideline, however, is not part of the RRB regulations. 20 CFR 202.6.

When issuing its regulations, the IRS declined to implement a less than 10 percent rule.  The Service stated that situations can arise where one of the factors is less than 10 percent while the remaining factors are greater than 10 percent, (factors here refers to revenue, employees and output). It is not clear that the service or operation of equipment or facilities would be insubstantial in those situations.

Receiver or Trustee as Employer

The definition of employer, at IRC § 3231(a), also includes:

"...Any receiver, trustee, or other individual or body, judicial or otherwise, when in the possession of the property or operating all or any part of the business of any such employer;…”

This would only apply to individuals who would be employees if the property or business operation had continued in the possession of the preceding employer.  This situation could occur, for example, if a railroad sought protection through the bankruptcy court, and the bankruptcy court appointed a trustee to operate the company.  The trustee would be a railroad employer of the carrier's employees.

Railroad Associations

The definition of employer also includes railroad associations, tariff bureaus, demurrage bureaus, weighing and inspection bureaus, collection agencies, and other organizations that are:

  1. Controlled and maintained wholly or principally by two or more employers and
  2. Engaged in performing services in connection with or incidental to railroad transportation.  An organization is engaged in performing services incidental to railroad transportation when such function would normally, in the absence of the organization, be performed by the constituent employers.

Railway Labor Organizations

The term employer includes railway labor organizations that are national in scope and organized in accordance with the provisions of the Railway Labor Act. "Employer" also includes the following railway labor organization subordinate units established according to constitution and by laws:

  1. State and national legislative committees
  2. General committees
  3. Insurance departments
  4. Local lodges and divisions.

Exclusions From "Employer"

IRC § 3231(a) excludes certain companies from the definition of "employer".

  1. A street railway, or interurban or electric railway, unless it is operating as a part of a general steam-railroad system of transportation.  (This definition also includes a general rail transportation system operated by electric, diesel, or other means of power.)
  2. any company because it is engaged in mining coal, supplying coal to an employer if delivery is not beyond the mine tipple, and operating equipment or facilities therefore, or in any of these activities.

Employee

For purposes of RRTA, "employee” is defined at IRC § 3231(b), and Treas. Reg. § 31.3231(b)-1 provides that an employee includes any individual who is:

  1. In the service of one or more employers,
  2. An officer of an employer,
  3. An employee of a local lodge or division defined as an employer, or
  4. In the service of a general committee.

In the Service of One or More Employers

The definition of "employee”, for RRTA purposes, is very similar to the definition of an employee for FICA purposes.  Treas. Reg. § 31.3231(b)-1 defines a worker as an employee if he or she is:

  1. Subject to the continuing authority of the employer who supervises and directs the manner in which the employee's services are rendered,
  2. Rendering professional or technical services integrated into the staff of the employer
  3. Rendering other personal services on the property used in the operations of the employer which are an integral part of those operations.

With respect to 2 and 3 above, an individual performing services as an independent contractor may be, with regard to such services, in the service of an employer within the meaning of these paragraphs. See Treas. Reg. § 31.3231(b)-1(a)(3).

Treas. Reg. § 31.3231(b)-1 goes onto provide additional facts to be considered, including:

  • It is the right to control, not the actual exercise of this right, that is important
  • The right of the employer to discharge the worker is an important indication that the worker is subject to direction and control
  • The furnishing of tools and the furnishing of a place to work are important indications that the worker is subject to direction and control
  • If the worker is subject to control and direction merely as to the results to be achieved, and not as to the means for achieving those results, the worker would generally be considered an independent contractor
  • Whether or not a worker is an employee must be determined based upon an examination of the particular facts of the case
  • If a worker is an employee, it is of no consequence that the worker is designated as a partner, independent contractor, etc.
  • If a worker is an employee, it is of no consequence that the worker performs the services on a part-time basis.

Officer

Similar to the rules under FICA, an officer of an employer is one who performs the duties of his or her office for compensation.

Special Categories

The definition also includes provision to include as an employee those individuals performing services on behalf of a railway labor organization.  If you are involved in the examination of a labor organization, refer to the code and regulations for the rules to be applied.

Exclusions

The term "employee” excludes individuals engaged in certain coal mining operations, as follows:

  • Coal mining
  • Preparing coal
  • Loading coal at the tipple
  • Handling coal between the mine and the tipple, unless the handling consists of movement by rail with standard locomotives.

Compensation

Comparison of RRTA to FICA

The definition of compensation for RRTA purposes is found at IRC § 3231(e), and, while there are historical differences between the FICA and RRTA statutes, there are also significant similarities. Legislation enacted over the years has made the RRTA Tier I tax identical to the FICA tax as well as conforming the Tier I wage ceiling to the FICA wage ceiling.

Along with conforming the structure of the RRTA to parallel that of the FICA, the exclusions from the definition of compensation under RRTA, with few exceptions, mirror the exclusions from the definition of wages under FICA.  These exclusions from compensation include non-monetary benefits such as fringe benefits, meals and lodging excludable under IRC § 119, and employer-paid life insurance premiums for group-term life insurance under $50,000.

In amending RRTA, Congress often indicated the purpose was to provide conformity to FICA.  Congress has added references to FICA provisions in the RRTA definition of successor employer and the rules for non-qualified deferred compensation (IRC §§ 3231(e)(2)(C) and 3231(e)(8), respectively).  In addition, Tier I benefits are designed to be equivalent to social security benefits, and are subject to federal income taxation in the same manner as social security benefits.

For calendar years after December 31, 1992, Treas. Reg. § 31.3231(e)-1(a)(1) provides that "compensation" for computation of RRTA taxes has the same meaning as the term "wages" under IRC § 3121(a), except as specifically limited by the Railroad Retirement Act or regulations

Included and Excluded

The Code provides for the inclusion or exclusion of the following items:

  • IRC § 3231(e)(1) -

Include -
1. Money remuneration for services rendered 
Exclude -
2. Payment for health insurance plan
3. Tips (but see IRC 3231(e)(3) below)
4. Employee business expense advance or reimbursement

  • IRC § 321l(e)(2) - provides for the application of the Tier I and II wage base amounts
  • IRC § 3231(e)(3) -
    includes cash tips unless the amount of cash tips is less than $20 for any calendar month
  • IRC § 3231(e)(4) -
    excludes payments from Tier I taxes that are made on account of sickness or accident disability to the extent they are received under a workmen's compensation law or RUIA.
  • IRC § 3231(e)(5) -
    excludes amounts for employee achievement awards, scholarship and fringe benefits, if the employee will meet the requirements or IRC §§ 74(C), 117, and 132, respectively.
  • IRC § 3231(e)(6) -
    excludes educational assistance program payments if the employee will meet the requirements of IRC § l27,
  • IRC § 3231(e)(7) -
    excludes qualified group legal service plan if the employee will meet the requirements of IRC § 120.
  • IRC § 323l(e)(8) -
    includes amounts contributed to a 401(k) plan in general, conforms RRTA rules with FICA rules with respect to non-qualified deferred compensation.
  • IRC § 3231(e)(9) -
    excludes meals and lodging if the employee will meet the requirements of IRC § 119.

Earned vs. Paid

As a historical note, in prior years RRTA was computed at the time of payment using the tax rates in effect when the compensation was earned.  RRTA also used a monthly wage base limitation rather than an annual wage base.

The statute was eventually modified to bring RRTA into conformity with FICA. Since 1985, the tax has been computed using rates in effect at the time of payment, regardless of when the compensation was earned. In addition, RRTA uses the annual wage base limitations rather than monthly limits.

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5.  Audit Techniques

Audit Plan

This chapter provides a suggested audit plan for the examination of a railroad for employment tax purposes.  The audit plan presented would result in a fairly complete review of the employer for compliance with filing requirements, correct treatment of various types of payments, employee/independent contractor issues, etc.  Depending on the time allotted to your specific examination, or prior examination history, it may be necessary to tailor the plan to your case by eliminating certain steps.

  1. Preliminary
    • Request copies of the following reports from the taxpayer
    • ICC Form A & B
    • RRB Form BA-3a
    • RRB Form BA-4
    • RRB Form BA-9
    • RRB Form BA-10
  2. Request a listing of all payroll returns filed by company and by type (i.e. Forms CT-1, 941, 940).
  3. Establish which companies and/or employees are covered by each return.

Payroll System

  1. Ask the taxpayer the following questions:
    • Are there any known errors on the returns under examination?
    • Are there any outstanding amended/corrected returns in regard to the Forms CT-1/941 for the years under examination?
    • Are there any amended/corrected returns being prepared or contemplated by the taxpayer regarding the Forms CT-1/941?
    • Are there any work papers or summaries available reconciling the return to the books or showing the account summaries for reporting the various taxable components on the Form CT-1?
    • Are there any work papers or summaries relating to payroll from other sources, such as audits or examinations by Internal Audit, State Agencies, RRB, other internal/external sources?

      Follow-up to secure copies of any of the above information, as appropriate.
  2. Have the taxpayer explain the payroll and accounting process with regard to:
    • How the determination is made as to whether an employee is covered by RRTA or FICA.
    • Payroll payments that may be excluded from Tier I and Tier II tax.
    • Whether compensation is reported on an earned or paid basis.
    • How the work hours for the supplemental annuity tax are determined.

Computer Audit Specialist (CAS) Applications

  1. Obtain the following computer information:
    • Form W-2 tapes
    • Form 1099 tapes
    • RRB Forms BA-3a, BA-4, BA-9 and BA-10 tapes
    • Payroll master file or record layouts
  2. Have the CAS:
    • Reconcile the W-2's to the 1099's to identify the conversion of workers from employees to independent contractors and/or to identify payments being made to employees who have been excluded from RRTA taxation.
    • Reconcile the Form W-2 tape to the BA-3a tape, taking into account 401(k) contributions and group term life insurance calculations.  This may identify payments reported on the BA-3a but excluded from RRTA taxation.
    • Reconcile the W-2 tape to the BA-9 tape. Discrepancies may indicate severance or dismissal payments which have been excluded from RRTA taxation.
    • Reconcile the W-2 tape to the BA-3a tape. Discrepancies may indicate sick pay payments which have been excluded from RRTA taxation.

Reconciliation of CT-1's

Determine whether or not Tier I and Tier II wage and tax amounts have been correctly reported by conducting the following tests:

  • Reconcile CT-1, line 5, to BA-3a. (Tier I)
  • Reconcile CT-1, line 6, to BA-3a. (Tier I)
  • Reconcile CT-1, line 11, to BA-4. (Tier I)
  • Reconcile CT-1, line 11, to BA-4. (Tier II)
    Note: request all Forms BA-4 filed with the RRB during the year and identify the reason for each adjustment.  Consider only those adjustments with a RRTA tax affect.  Compare this total to the railroad’s supporting work papers for line 11 of the CT-1.  Watch for statute of limitations, cash vs. earned, correction of errors, and incorrectly reported compensation
  • Verify that the correct wage base and tax rates have been used.
  • Review the chart of accounts for account titles that are related to employee compensation.  If any are found, test to determine whether or not they were included in taxable compensation.  Be aware of payments being made through accounts payable or voucher accounts.

Supplemental Annuity Tax

Determine whether or not the Supplemental Annuity Tax (SAT) has been correctly reported.  A safe harbor method of computing SAT is available for years after 12-31-93.  See the Section on SAT in the "Definitions" section of this guide.

RURT

Railroad Unemployment Repayment Tax - This tax was terminated effective with respect to payments made on or after July 1, 1993.  However, in the event it is reinstated, the following audit techniques are suggested:

  • Ask the taxpayer how the tax was computed.
  • Reconcile CT-1 RURT wages to Form BA-3a RUIA wages.
  • Select a sample of employees from the Form BA-3a to test for proper RURT computation.
  • Determine the impact of any discrepancies found for Tier I and/or Tier II purposes for RURT purposes.

Fringe Benefits

  1. Review the chart of accounts for account titles that indicate which fringe benefits are being offered.
  2. Request policy statements for fringe benefits that are offered to employees.  The policy should describe the following:
    • The benefit.
    • Which employees or group of employees are entitled to the benefit.
    • The requirements any employee must satisfy to qualify for the benefit.
    • Any limitations that are placed on any employee or group of employees in regard to use of the benefit.
    • The accountability requirements, if any, an employee is required to follow.
    • The RRTA Tier I and Tier II treatment of the benefit.
    • The federal income tax withholding treatment of the benefit.
    • How the benefit is reported to the recipient (i.e W-2, Form 1099, no reporting, etc.).
  3. Determine whether the fringe benefits are being treated properly for RRTA Tier I, Tier II and income tax withholding purposes. Consider:
    • Is a nontaxable benefit being offered that is not covered by IRC § 3121(a)?  If so, pursue further.
    • Is a nontaxable benefit being offered that appears to discriminate in favor of highly compensated individuals?  If so, pursue further.
    • Is a nontaxable benefit being offered on a flat rate basis without proper accountability? If so, pursue further.

Backup Withholding

Backup withholding applies to a railroad employer just as to any other type of employer.

The filed 1099's should be inspected, either by hard copy or tape, to determine whether or not any were filed with missing, incomplete, or obviously incorrect taxpayer identification numbers.  Take appropriate action with respect to any discrepancies discovered.

The taxpayer’s policies and procedures for determining when a 1099 must be issued should be reviewed and tested by comparison to accounts payable vendor listings.  The agent will have to make a decision on the necessity and/or depth of this compliance check based on such factors as prior audit history with the taxpayer, completeness and accuracy of policies and procedures, availability of computerized records for conducting the compliance test, etc.

Conversion Issues

Section 530 of the Revenue Act of 1978 applies to a railroad employer just as to any other type of employer, and must be considered prior to initiating any conversion issues.  This section, as amended through the years, provides an employer with relief from Federal employment taxes with respect to workers who have been reclassified as employees.  Section 530 relieves the employer from paying and withholding any employment taxes (including withholding on income tax) with respect to these employees not only for the period covered by the audit, but for future periods as well.

The Classification Settlement Program (CSP) is also available to railroad employers in the event of a reclassification issue.

The examiner should refer to the materials relating to worker classification that are included in this desk guide.

FICA vs. RRTA.

Determine whether the taxpayer has a group of employees who are covered by FICA rather than RRTA and if this is appropriate. Consider reclassifying for RRTA coverage under IRC Section 3231(a) and (b).

Determine whether the taxpayer owns or directly controls any entities that meet the definition of a carrier under IRC Section 3231(a) and has employees that are covered for FICA rather than RRTA.  Consider reclassifying for RRTA coverage under IRC Section 3231(a) and (b).

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6. Potential Issues

General

General Comments

Almost any issue that might be present in a FICA employment tax case may also be present with respect to a railroad employer.  Therefore, the examiner should consider current issues from other types of cases whenever examining a railroad employer.

Employee vs. Independent Contractor

The method of determining a worker to be an independent contractor or an employee is the same for a railroad employer as it is for any non-railroad employer.

Reference materials concerning worker classification have been included in this guide to assist the examiner in developing these issues.

The Classification Settlement Program would also apply to a railroad employer.

Section 530

Section 530 has the same application to a railroad employer as it does to any other type of employer.  The taxpayer should be provided the handout concerning Section 530 before beginning any conversion issues.

General Issues

Consider the following during the course of the employment tax examination:

  • Treatment of severance pay as non-qualified deferred compensation
  • Treatment of bonus and award payments as other-than compensation
  • Treatment of employees as independent contractors
  • Treatment of medical reimbursement plans
  • Treatment of employee relocation expense reimbursements
  • Treatment of related entities as FICA employers

This list is not meant to be all-inclusive.  It is only meant to demonstrate the fact that issues present in non-railroad employment tax cases may also be present, and should be considered, in a railroad employer examination.

Industry Specific Issues:

Severance Pay/ Termination Pay

Railroad employers have been very aggressive in attempts to treat severance pay and/or termination pay as not subject to RRTA.

Some of the arguments for this are...

  1. Severance/termination pay represents the buyout of a contract right, and is not taxable based on Revenue Ruling 58-301, 1958-1 C.B. 23.
  2. Severance payments are not subject to RRTA tax because the payments represent supplement unemployment benefit payments (SUB pay).  See CSX Corp. et. al v. United States, 518 F.3d 1328 (Fed. Cir. 2008).  
  3. Severance payments made after the year of termination constitute nonqualified deferred compensation under IRC § 3121(v)(2) as incorporated in IRC § 3231(e)(8)(B). 

With regard to the first argument, the government takes the position that Revenue Ruling 75-44, 1975-1 C.B. 15, is controlling, and that the payments represent compensation for past services rather than the buyout of contract rights.

With regard to the employer's secondary argument, there is no statutory provision for SUB-pay under IRC § 3221(e).  SUB-pay is excluded administratively from compensation for RRTA purposes as a result of the Service’s issuance of a series of FICA and FUTA revenue rulings dating back to 1956.  Revenue Ruling 56-249, 1956-1 C.B. 488, provides a limited exception from the definition of wages for FICA, FUTA and federal income tax withholding for certain payments made upon the involuntary separation of an employee from the service of the employer.  Rev. Rul. 56-249 sets forth eight criteria for determining if payments meet the limited exception. By extending the application of this revenue ruling to the railroad employer's severance/termination plan, it can usually be demonstrated that the plan fails most, if not all, of the eight criteria. Thus the payments made to the employees are not excludable from RRTA.

The third argument is that the payments are compensation in the form of periodic severance pay and if made beyond the year of termination constitutes nonqualified deferred compensation under IRC § 3121(v)(2) as incorporated in IRC § 3231(e)(8)(B). The Service’s position is that payments made under a severance plan are not deferred compensation (see Treas. Regs. § 31.3121(v)(2)-1, and Kraft Foods v. United States, 58 Fed. Cl. 507(2003))

Annual Productivity Fund Payments

In order to reduce costs, some railroad employers have negotiated agreements with their employees to reduce the size of the crew operating the train. In return for agreeing to reduce the size of the crew, the employees receive additional payments from the employer.

The employer agrees to set aside a certain amount of money throughout the course of the year, based on the number of trains operated with a reduced crew. Then, after year-end, each employee who participated in the operation of a train with a reduced crew receives a pro rata share of the funds set aside by the employer.

Employers have attempted to classify these payments as other than compensation for services, and therefore as not subject to RRTA. Employers generally base their position on Revenue Ruling 58-301, 1958-1 C.B. 23, modified and superseded by, Rev. Rul. 2004-110, 2004-2 C.B. 960.

The service has taken the position that these payments represent compensation for services rendered, and are subject to RRTA.  The service position is based on Revenue Ruling 75-44, 1975-1 C.B. 15.  In Rev. Rul. 75-44, the Service expressly distinguished the unexplained holding in Rev. Rul. 58-301 by pointing out that lump sum payments "for the past performance of services reflected in the employment rights [an employee] was giving up" are wages, whereas the relinquishment of a purely contractual right is not "wages."  STA of Baltimore – ILA Container Royalty Fund v. United States, 621 F. Supp. 1567 (1985), aff’d, 804 F.2d 296 (4th Cir. 1986).  This case held that payments made by employers into a “royalty fund” that were subsequently shared by eligible employees were “wages” for FICA and FUTA purposes.

If these types of payments are found, it is suggested that a request for Technical Advice be submitted because of the fact intensive nature of this issue.  Revenue Ruling 75-44, is not sufficient to support this type of issue.

Productivity Fund Buyouts

Some employers, having negotiated a productivity fund system, have subsequently offered employees a lump sum payment in exchange for the employees’ giving up any rights to receive future payments from the productivity fund.  These plans generally call for a payment to be made to the employee at the time the employee accepts the buyout, with an additional payment to be made to the employee at the time the employee leaves the service of the employer.

As with the issue presented above, employers have attempted to classify these payments as other than compensation for services, and therefore as not subject to RRTA, basing their position on Revenue Ruling 58-301.

The Service relies on Rev. Rul. 75-44 and Rev. Rul. 2004-110 to support its position that these payments represent compensation for services rendered, and are subject to RRTA.

Employee Achievement Awards

Employers frequently institute programs to recognize and reward employees for safety, perfect attendance, and other similar types of achievement.  In at least a few cases, railroads have chosen to give the employees shares of stock as the reward under these programs.  A dispute has arisen concerning the taxability of the stock for RRTA purposes.  The railroads are taking the position that stock does not meet the definition of compensation. (Other railroads may be taking this same position with respect to other forms of remuneration such as “reward points”, "bonus points”, etc.)

The argument of the railroad employers can be summarized as follows:

Both the RRA and RRTA define compensation as ”money remuneration". "Money" is a well defined term referring to coin and paper currency, and stock does not meet this definition.

For FICA purpose, compensation is defined as all remuneration, including the cash value of remuneration paid in some medium other than cash.  Stock would meet this broader definition of compensation.

Over the years Congress has had many opportunities to conform the definition of compensation for RRTA and FICA purposes, and in fact has done so with respect to some aspects of the definition.  However, Congress has never chosen to remove the term “money" from either the RRTA or RRA definition.

Since Congress included “money" in the definition of compensation, it must have had a reason for doing so, and the RRB and/or IRS cannot ignore the use of the word when issuing regulations.

Therefore, payments made to employees in the form of shares of stock are excludable from compensation for RRTA and RRA purposes.

The IRS and RRB position, on the other hand, is as follows:

While there are historical differences between the FICA and RRTA statutes, there are also significant similarities.  Legislation enacted over the years has made the RRTA Tier I tax identical to the FICA tax as well as conforming the Tier I wage ceiling to the FICA wage ceiling.  See, e.g., T.D. 8582, 1995-1 C.B. 187.

Along with conforming the structure of the RRTA to parallel that of the FICA, the exclusions from the definition of compensation under RRTA, with few exceptions, mirror the exclusions from the definition of wages under FICA.  These exclusions from compensation include non-monetary benefits such as fringe benefits, meals and lodging excludable under section 119 of the Internal Revenue Code, and employer-paid life insurance premiums for group-term life Insurance under $50,000.

In amending RRTA, Congress often indicated the purpose was to provide conformity to FICA.  Congress has added references to FICA provisions in the RRTA definition of successor employer and the rules for non-qualified deferred compensation (323l(e)(2)(C) and 323l(e)(8), respectively).  In addition, Tier I benefits are designed to be equivalent to social security benefits, and are subject to federal income taxation in the same manner as social security benefits.

Although the two statutes are not completely identical, the language of the regulations for RRTA indicates that the term compensation has the same meaning as the term wages for FICA.

It should be noted that new regulations regarding the definition of compensation were issued in 1994, clarifying that compensation for RRTA and FICA purposes was essentially the same. See Treas. Reg. § 31.3231(e)-1(a).

If you encounter this issue contact the Ground Transportation Technical Advisor for current information on our position.

Housing Allowances

See Rev. Rul. 69-391; 1969-2 C.B. 191, concerning of the value of housing provided to railroad employees.

Meals, Travel, Lodging

See Rev. Rul. 75-279, 1975-2 C.B. 409. Generally, allowances for travel expenses are not wages subject to RRTA taxes if the employee is required to take a period for substantial rest away from home, or if the employee is away from home overnight while on service, and made a full accounting for the allowance.

Other allowances for shorter trips when the employee does not require substantial rest away from home or is not away from home overnight are includible in wages subject to RRTA taxes.

Segregation

Segregation is a concept used for the separation of employees subject to FICA taxes from those subject to RRTA taxes.  Although the concept of segregation at one time was not present in the IRC or Regulations, the Service had used the concept in publishing rulings.  In 1994, Treas. Reg. § 31.3231(a)-1 was amended, by adding paragraph (f).  This new paragraph incorporated the concept of segregation into the regulations.

The purpose of segregation is to obtain a fair and reasonable application of law, but it cannot be used in all cases.  For example, it cannot be used if the records are inadequate or if the railroad and non-railroad work is so commingled that it cannot be separately identified.

Segregation is permitted only if the employer in question is principally engaged in non-railroad activities.  "Principally engaged," for this purpose, is 50 percent or more.  This determination requires consideration of relative revenues, number of employees, payrolls, output, facilities in use, and the character of customers.  Sound judgment will dictate the test or combination of tests to use for your determination.  You may want to incorporate into your determination process consideration of relative net profits and the amount of control over such profits exercised by the parent railroad; also, you may take into consideration the demonstrated purpose for creation of the company and the principal occupation and interest of company executives.

Excluded Companies

Segregation cannot be used for express companies, sleeping car companies, or carrier railroads.  Segregation can be used when, for example, a company has two different businesses and there is a definite separation between them.

Principally Engaged in Railroad Activities

Since, as stated, segregation is not applicable to a company that is principally engaged in railroad activities, you will have to determine the status of a given company by some or all of the following comparisons.

  • Revenues
  • Number of employees
  • Payrolls
  • Output
  • Facilities in use
  • Character of customers

Because the objective is to cover under RRTA all employees that perform some railroad services, it is important that the tests clearly reflect the business activities of the company.  The best tests to accomplish this purpose must be selected on a case-by-case basis.

  • Illustration - In the case of an office building, test by output (relative occupancy) and character of tenants (relative number of RRTA and non-RRTA employers).  It is immaterial to the latter test that non-RRTA employers include those owned or controlled by RRTA employers.  The ultimate test is whether the building primarily serves RRTA employers and if so, it is not eligible for segregation.

Separate, Identifiable Enterprise

Segregation can be applied only to a separate identifiable enterprise. Therefore, when a company's records are commingled so that the enterprise cannot be separately identified, segregation cannot be applied.

In some cases, the records for railroad activities and for non-railroad activities must, in order to meet the test, be kept as if the company were operating two separate divisions.  In other cases, the records do not need to be as separate.  In determining the extent to which records need to be separately maintained, consider the extent, scope, and inter-relationship of the railroad and non-railroad operations.  The larger the size of the company and the territory covered, and the more the railroad and non-railroad operations are related, the more independent the records should be in order for the railroad operation to quality as a separate identifiable enterprise for purposes of segregation.

Court Cases

A number of court cases and revenue rulings have dealt with the issue of segregation.  See in general, the discussion that follows concerning related corporations.
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Employer Issues

Common Paymaster

The common paymaster rules apply when the total wages of an employee of two or more related RRTA employers are paid by one of the RRTA employers.  The common paymaster is treated as the sole employer for purposes of the RRTA taxes and the annual wages base.

The common paymaster rule, however, does not apply if the employers are not related, or if the employers are not all RRTA employers.  Thus, an RRTA employer cannot be a common paymaster for FICA purposes and a FICA employer cannot be a common paymaster for RRTA purposes.

Successor Employers

The RRTA adopts the successor provisions found under FICA at IRC § 3121(a)(1), allowing an employer that acquires and continues a business of another employer to include wages paid by the prior employer for purposes of determining the annual wage base limitation.  However, the RRTA requires that the terms "employer", "service" and "compensation" be given their meaning under RRTA.  As a result, successor employer issues involving FICA and RRTA employers cannot be commingled.
 
Related Corporations:

“Employer” is defined by IRC § 3231(a) for RRTA purposes as a company under some kind of control by a railroad that provides a railroad-related service that is not a trucking service, casual service, or the casual operation of equipment or facilities.  This definition has generated a long line of court cases dealing with the issue of whether or not a related company should be considered a railroad employer.  The courts have generally held that if an entity’s operations are related both “functionally” and “economically” to a carrier under common control with the entity, the entity is an “employer” within the meaning of the RRTA.

Some of the related corporation issues that have been considered by the courts are presented below.

Car Repair Shops

Car repair shops – Despatch Shops, Inc. v. Railroad Retirement Board, 153
F.2d 644 (D.C. Cir. 1946) regarding RUIA and Despatch Shops, Inc. v. Railroad Retirement Board, 154 F.2d 417 (2d Cir. 1946) regarding RRA.  The taxpayer argued that it should not be treated as a railroad employer because it was a separately incorporated manufacturing company distinct from its parent, a railroad, and because it was doing heavy repairs and manufacturing similar to that done by other, similar non-railroad companies.  The court rejected this argument, stating:

“If Despatch, in this situation, is not an 'employer' under the Act it can be readily seen that the railroads would be free to take from under the Act virtually all of their workers whose employment is in the ‘supporting’ activities, through the simple expedient of setting up wholly owned corporate affiliates to perform these services.  It is conceivable that everything from maintenance-of-way through engineering or bookkeeping might be done by so called 'independent' corporations.”

Warehousing and Warehouse Companies

Warehousing and warehouse companies - Railroad Retirement Board v. Duquesne Warehouse Co., 326 U.S. 446(1946).

Construction Companies

Construction companies - Southern Development Company v Railroad Retirement Board, 243 F.2d 351 (8th Cir. 1957).

Real Estate Companies

Real estate companies - Standard Office Building Corp. v. United States, 819 F.2d 1371 (7th Cir. 1987).  In this case, the position of the Service was that employees of Standard, owner and operator of an office building, were RRTA employees because the company was controlled by a railroad and the building was more than half occupied by offices of the railroad.

Although the position of the Service was sustained by the district court, that court was reversed by the appellate court on the basis that the taxpayer was not covered by RRTA because it was incorporated prior to the passage in 1937 of the RRTA, and because its employees would have secured a pension windfall if covered under RRTA. The portion of the building occupied by the railroad did not exceed 57 percent during the period in question.

By contrast, in the Southern Development case, cited earlier, Southern was controlled by a railroad and owned an office building, 64 percent of which was occupied by offices of the railroad.  The railroad paid 73 percent of the total rents of the building equal to 39 percent of Southern's total income.  Although Southern owned other properties all of its employees were engaged in the operation of the office building.  Based on these facts, Southern was held to be an RRTA employer. The rationale of Southern was adopted in Rev. Rul. 74-121, l974-l C.B. 300.

These contrasting decisions highlight the fact that it cannot be assumed that any subsidiary corporation performing a railroad related function will be held to be an RRTA employer, even though it appears to meet the two tests of IRC § 3231(a). The result will depend on how the subsidiary unit fits into the general scheme of corporate operations.  If its service is truly significant to transportation, a good case can be made and, if not, all attempts to classify it as an RRTA employer may be fruitless.

Data Processing Companies

Issues involving these companies do not markedly differ from the preceding ones, particularly if the data processing company is controlled by a railroad and appears to have little reason for coming into existence other than to take a group of employees out of RRTA and make them subject to the lesser FICA taxes.

However, assume for discussion that a subsidiary of a railroad conglomerate provides data processing services to the railroad while also providing such services to banks, mutual funds, and other non-railroad clients.  In addition, another subsidiary is formed to provide computer programmers and software to the first subsidiary to the extent of 3O percent of its services, with the balance being provided to non-railroad clients.

Taxability of the subsidiaries for RRTA purposes is not dependent on the percentage of service as much as it is dependent on the degree to which the services are integrated into the normal functions of the railroad.

It can be argued that computer programming and design of software is as essential to railroad operations as is the leasing of office space or the furnishing of accounting services.  It would follow then that employees of the subsidiaries who render such services are subject to RRTA taxes.  However, it does not necessarily follow that the companies are RRTA employers with respect to all of their operations or all of their employees.

Examination Techniques, Related Corporations

Most issues concerning a parent and subsidiary relationship can be developed in a similar fashion. The guidelines presented below present a suggested method that can be modified, as appropriate, to fit the circumstances of your specific case. Also remember that while a subsidiary of a railroad employer may also be a railroad employer, the parent of a railroad employer is not a railroad employer under Union Pacific Corporation v. United States, 26 Cl. Ct. 739 (1992), aff'd, 5 F.3d 523 (Fed. Cir. 1993).

Subsidiary Records

Review the subsidiary's corporate minute book and stock record book to ascertain:

  • The date of incorporation
  • The stated corporate purpose
  • The exact location of the subsidiary
  • The stock authorized and issued, including a complete stock history from inception to the present

Parent Records

Analyze the following schedules on Form R-1, Annual Report to the Surface Transportation Board, of the parent corporation:

  • Schedule A, Identity of Respondent with Affiliated Companies
  • Schedule 310, Investments in Affiliated Companies
  • Schedule 310A, Investments in Common Stock of Affiliated Companies
  • Schedules 352A to 352B, Road and Equipment Property (These schedules can help in reconciling and locating property used by the entity under examination)
  • Schedule 410, Railway Operating Expenses (Look for expenses paid to a subsidiary that is supposedly not an RRTA company)
  • Schedule 512, Transactions Between Respondent and Companies or Persons Affiliated with Respondent for Services Received or Provided

Review the corporate minute book for:

  • Advances from the parent to the affiliate (Note date, amount, terms and purpose)
  • Financial forecasts for the affiliate, including monthly, quarterly, semiannual, annual, and other long-range forecasts
  • Budgets, proposed and actual, prepared by or for the company

Contractual Relationship

Determine the contractual relationship between the parent and subsidiary by examining all intercorporate contracts.  Pay particular attention to those for services to be rendered by the parent company.  Compare the contracts with similar contracts between non-affiliated companies and ascertain:

  • Whether transactions were at arms length
  • The amount of income derived by the subsidiary from the parent as compared with income from other sources
  • Contractual amounts expended by the parent to its affiliate, compared with similar amounts expended to non-affiliated companies
  • Whether persons presently under contract with the affiliate were formerly employed by the parent

General Inquiries

Make the following general inquiries:

  • Were private letter rulings obtained with reference to the issue? (If so, obtain copies and determine whether or not the facts as presented were complete and accurate in their presentation of the situation in question.)
  • Was the entity in question ever subject to RRTA taxes? (If so, determine why and when it was removed from coverage.)
  • Were letter opinions obtained from the Railroad Retirement Board? (If so, obtain copies and determine whether or not the facts as presented were complete and accurate in their presentation of the situation in question.)

Note: Letter opinions on coverage were issued by the RRB’s General Counsel prior to 1992.  After 1991, the RRB’s Board Members made such coverage rulings referred to as Board Determinations on coverage.

  • Obtain a copy of the Employer Status Listing published by the RRB, and, if necessary, secure more specific information from the Board via the Ground Transportation Technical Advisor
  • Refer to Moody's Transportation manuals for other useful information
  • Compute the operating ratio of the company in question for several years, if possible, and make further studies if the ratio exceeds 100 for a sustained period

Other Considerations

Analyze any statistical, financial, profitability, and feasibility studies made by or on behalf of the parent company.  Such studies would generally provide a basis for important decisions that may affect the subsidiary in question.

Review the Authority for Expenditures (AFE's) or at least the AFE logbook for acquisitions that affect the subsidiary in question and, if found, determine if they were subsequently charged back to the parent.

Review correspondence and filed records if the company maintains an index or log of such documentation.

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7. Report Writing

General

Report writing for RRTA purposes is similar to report writing for any other type of employment tax examination.  However, certain forms must be modified  for differences between RRTA and FICA rates and tax categories.

Form 4665, Form 4666, Form 886A, Form 2504, Form 2297, Form 3363

The forms listed above are used in a similar fashion for an RRTA report as in any other type of employment tax report.  In an unagreed case the report should include a complete narrative write up of facts, law, and argument.  Refer to general employment tax report writing instructions when completing these forms.

Form 4668

Form 4668 must be modified to account for Tier I and Tier II taxes.

Care should be taken to ensure that the appropriate wage base and tax rate amounts are used when completing this form.

Form 4667

Since railroad employers are not subject to FUTA, Form 4667 is not used. However, if workers were treated by the employer as being subject to FUTA and those workers are being converted to railroad employees, the examiner should prepare a report reflecting the over assessment of FUTA.  The examiner should include a recommendation to transfer the FUTA to any RUIA liability. See IRM 4.23.8.6.2.

Conversion Case

If an employer treated certain workers as employees subject to FICA, and it is determined that the workers should correctly be treated as employees subject to RRTA, or vice versa, it may be necessary to prepare two reports: one to process the deficiency, and one to process the over assessment.

Refer in general to IRM 4.23.8.6.2 for special rules concerning this type of case.

Prior to making a conversion, consideration must be given to the statutory period of limitations. Some employers may already have filed 941 returns as well as CT-1 returns. Do not undertake a conversion issue unless the statute on the return for which additional tax is due has been protected.

Where the conversion case involves a delinquent return, follow the usual substitute for return/delinquent return procedures.

In an agreed conversion case, where wages are converted from FICA to RRTA, only the net additional tax due will be assessed.

If the conversion is unagreed, the taxpayer should be advised to file a claim under IRC § 3503 for the FICA.  The examiner will propose the assessment of the full amount of the RRTA taxes, and the claim will not be acted upon until the final resolution of the unagreed case.

IRC § 3509

The provisions of IRC § 3509 do not apply to RRTA taxes.
 
Computation of Tax

Tier I
Tier I tax is the equivalent of FICA and Medicare, and is computed in the same manner, using the same annual wage base and tax rates.  It is assessed equally on the employer and employee.

Tier II
Tier II tax uses a separate annual wage base and tax rate from those applicable for Tier I.  In addition, the tax is not assessed equally on the employer and employee. Instead, the employer pays a significantly greater share of this tax.

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8. Other Considerations

Statutory Period of Limitations

Form CT-1 is an annual return, due by the last day of the second month following the end of the calendar year (i.e., February 28th) see Treas. Reg.   § 31.6071(a)-1(b). The normal statutory period of limitations expires three years after the due date, or the date filed, whichever is later.

The presumptive filing date pertaining to Form 941, found at IRC § 6501(b)(2), DOES NOT apply to Form CT-1.

Various courts have considered the question of whether or not the filing of Form 941 starts the running of the statute of limitations with respect to Form CT-1. Although the IRS has been sustained in some courts in its position that the filing of a Form 941 does not start the running of the statutory period of limitations with respect to the CT-1 at least one court has ruled otherwise. The court found that the Form 941 provided sufficient information for the IRS to assess the RRTA taxes, and, therefore, the three year statute for the Form CT-1 had started with the filing of the Form 941. As a result, aggressive action should be taken to protect the statutory period of limitations in all situations.

Form SS-1O
The statutory period of limitations for RRTA purposes is extended using Form SS-10.

Form SS-10 must be modified in order to extend the statutory period of limitations with regard to RURT taxes.  Line 1(a), which is normally used to extend the statutory period of limitations with respect to FUTA taxes, will not be effective for extending the statute with respect to RURT taxes.  Since FUTA taxes do not normally apply to a railroad employer, Line (1)(a) on Form SS-l0 should be changed to state: "The Railroad Unemployment Repayment Tax for Calendar years".

Questions or concerns with regard to extending the RURT statute should be discussed with the Ground Transportation Technical Advisor.  The Ground Transportation Technical Advisor can assist in obtaining advice from Counsel.

Penalties, Interest Free Adjustments, Abatements

Penalties, the provisions for interest free adjustments, and abatements apply to RRTA cases in the same manner as in any other type of employment tax examination.
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Page Last Reviewed or Updated: 24-Jan-2014

The Filing Taxes As A Student

Filing taxes as a student Publication 15-B - Main Content Table of Contents 1. Filing taxes as a student Fringe Benefit OverviewAre Fringe Benefits Taxable? Cafeteria Plans Simple Cafeteria Plans 2. Filing taxes as a student 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. Filing taxes as a student Fringe Benefit Valuation RulesGeneral Valuation Rule Cents-Per-Mile Rule Commuting Rule Lease Value Rule Unsafe Conditions Commuting Rule 4. Filing taxes as a student Rules for Withholding, Depositing, and ReportingTransfer of property. Filing taxes as a student Amount of deposit. Filing taxes as a student Limitation. Filing taxes as a student Conformity rules. Filing taxes as a student Election not to withhold income tax. Filing taxes as a student How To Get Tax Help 1. Filing taxes as a student Fringe Benefit Overview A fringe benefit is a form of pay for the performance of services. Filing taxes as a student 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. Filing taxes as a student Performance of services. Filing taxes as a student   A person who performs services for you does not have to be your employee. Filing taxes as a student A person may perform services for you as an independent contractor, partner, or director. Filing taxes as a student 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. Filing taxes as a student Provider of benefit. Filing taxes as a student   You are the provider of a fringe benefit if it is provided for services performed for you. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student Recipient of benefit. Filing taxes as a student   The person who performs services for you is considered the recipient of a fringe benefit provided for those services. Filing taxes as a student That person may be considered the recipient even if the benefit is provided to someone who did not perform services for you. Filing taxes as a student For example, your employee may be the recipient of a fringe benefit you provide to a member of the employee's family. Filing taxes as a student 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. Filing taxes as a student Section 2 discusses the exclusions that apply to certain fringe benefits. Filing taxes as a student Any benefit not excluded under the rules discussed in section 2 is taxable. Filing taxes as a student Including taxable benefits in pay. Filing taxes as a student   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. Filing taxes as a student Any amount the law excludes from pay. Filing taxes as a student Any amount the recipient paid for the benefit. Filing taxes as a student The rules used to determine the value of a fringe benefit are discussed in section 3. Filing taxes as a student   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. Filing taxes as a student However, you can use special rules to withhold, deposit, and report the employment taxes. Filing taxes as a student These rules are discussed in section 4. Filing taxes as a student   If the recipient of a taxable fringe benefit is not your employee, the benefit is not subject to employment taxes. Filing taxes as a student However, you may have to report the benefit on one of the following information returns. Filing taxes as a student 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. Filing taxes as a student For more information, see the instructions for the forms listed above. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student Generally, a cafeteria plan does not include any plan that offers a benefit that defers pay. Filing taxes as a student However, a cafeteria plan can include a qualified 401(k) plan as a benefit. Filing taxes as a student Also, certain life insurance plans maintained by educational institutions can be offered as a benefit even though they defer pay. Filing taxes as a student Qualified benefits. Filing taxes as a student   A cafeteria plan can include the following benefits discussed in section 2. Filing taxes as a student Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance). Filing taxes as a student Adoption assistance. Filing taxes as a student Dependent care assistance. Filing taxes as a student Group-term life insurance coverage (including costs that cannot be excluded from wages). Filing taxes as a student Health savings accounts (HSAs). Filing taxes as a student Distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care services. Filing taxes as a student Benefits not allowed. Filing taxes as a student   A cafeteria plan cannot include the following benefits discussed in section 2. Filing taxes as a student Archer MSAs. Filing taxes as a student See Accident and Health Benefits in section 2. Filing taxes as a student Athletic facilities. Filing taxes as a student De minimis (minimal) benefits. Filing taxes as a student Educational assistance. Filing taxes as a student Employee discounts. Filing taxes as a student Employer-provided cell phones. Filing taxes as a student Lodging on your business premises. Filing taxes as a student Meals. Filing taxes as a student Moving expense reimbursements. Filing taxes as a student No-additional-cost services. Filing taxes as a student Transportation (commuting) benefits. Filing taxes as a student Tuition reduction. Filing taxes as a student Working condition benefits. Filing taxes as a student It also cannot include scholarships or fellowships (discussed in Publication 970, Tax Benefits for Education). Filing taxes as a student $2,500 limit on a health flexible spending arrangement (FSA). Filing taxes as a student   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. Filing taxes as a student For plan years beginning after December 31, 2013, the limit is unchanged at $2,500. Filing taxes as a student   A cafeteria plan offering a health FSA must be amended to specify the $2,500 limit (or any lower limit set by the employer). Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student   For more information, see Notice 2012-40, 2012-26 I. Filing taxes as a student R. Filing taxes as a student B. Filing taxes as a student 1046, available at www. Filing taxes as a student irs. Filing taxes as a student gov/irb/2012-26_IRB/ar09. Filing taxes as a student html. Filing taxes as a student Employee. Filing taxes as a student   For these plans, treat the following individuals as employees. Filing taxes as a student A current common-law employee. Filing taxes as a student See section 2 in Publication 15 (Circular E) for more information. Filing taxes as a student A full-time life insurance agent who is a current statutory employee. Filing taxes as a student 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. Filing taxes as a student Exception for S corporation shareholders. Filing taxes as a student   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student Plans that favor highly compensated employees. Filing taxes as a student   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. Filing taxes as a student A plan you maintain under a collective bargaining agreement does not favor highly compensated employees. Filing taxes as a student   A highly compensated employee for this purpose is any of the following employees. Filing taxes as a student An officer. Filing taxes as a student A shareholder who owns more than 5% of the voting power or value of all classes of the employer's stock. Filing taxes as a student An employee who is highly compensated based on the facts and circumstances. Filing taxes as a student A spouse or dependent of a person described in (1), (2), or (3). Filing taxes as a student Plans that favor key employees. Filing taxes as a student   If your plan favors key employees, you must include in their wages the value of taxable benefits they could have selected. Filing taxes as a student 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. Filing taxes as a student However, a plan you maintain under a collective bargaining agreement does not favor key employees. Filing taxes as a student   A key employee during 2014 is generally an employee who is either of the following. Filing taxes as a student An officer having annual pay of more than $170,000. Filing taxes as a student An employee who for 2014 is either of the following. Filing taxes as a student A 5% owner of your business. Filing taxes as a student A 1% owner of your business whose annual pay was more than $150,000. Filing taxes as a student Simple Cafeteria Plans Eligible employers meeting contribution requirements and eligibility and participation requirements can establish a simple cafeteria plan. Filing taxes as a student Simple cafeteria plans are treated as meeting the nondiscrimination requirements of a cafeteria plan and certain benefits under a cafeteria plan. Filing taxes as a student Eligible employer. Filing taxes as a student   You are an eligible employer if you employ an average of 100 or fewer employees during either of the 2 preceding years. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student Eligibility and participation requirements. Filing taxes as a student   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. Filing taxes as a student 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. Filing taxes as a student S. Filing taxes as a student source. Filing taxes as a student Contribution requirements. Filing taxes as a student   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. Filing taxes as a student 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. Filing taxes as a student More information. Filing taxes as a student   For more information about cafeteria plans, see section 125 of the Internal Revenue Code and its regulations. Filing taxes as a student 2. Filing taxes as a student Fringe Benefit Exclusion Rules This section discusses the exclusion rules that apply to fringe benefits. Filing taxes as a student These rules exclude all or part of the value of certain benefits from the recipient's pay. Filing taxes as a student The excluded benefits are not subject to federal income tax withholding. Filing taxes as a student 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. Filing taxes as a student This section discusses the exclusion rules for the following fringe benefits. Filing taxes as a student Accident and health benefits. Filing taxes as a student Achievement awards. Filing taxes as a student Adoption assistance. Filing taxes as a student Athletic facilities. Filing taxes as a student De minimis (minimal) benefits. Filing taxes as a student Dependent care assistance. Filing taxes as a student Educational assistance. Filing taxes as a student Employee discounts. Filing taxes as a student Employee stock options. Filing taxes as a student Employer-provided cell phones. Filing taxes as a student Group-term life insurance coverage. Filing taxes as a student Health savings accounts (HSAs). Filing taxes as a student Lodging on your business premises. Filing taxes as a student Meals. Filing taxes as a student Moving expense reimbursements. Filing taxes as a student No-additional-cost services. Filing taxes as a student Retirement planning services. Filing taxes as a student Transportation (commuting) benefits. Filing taxes as a student Tuition reduction. Filing taxes as a student Working condition benefits. Filing taxes as a student See Table 2-1, later, for an overview of the employment tax treatment of these benefits. Filing taxes as a student Table 2-1. Filing taxes as a student Special Rules for Various Types of Fringe Benefits (For more information, see the full discussion in this section. Filing taxes as a student ) 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. Filing taxes as a student Exempt, except for certain payments to S corporation employees who are 2% shareholders. Filing taxes as a student Exempt Achievement awards Exempt1 up to $1,600 for qualified plan awards ($400 for nonqualified awards). Filing taxes as a student 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. Filing taxes as a student 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). Filing taxes as a student Educational assistance Exempt up to $5,250 of benefits each year. Filing taxes as a student (See Educational Assistance , later in this section. Filing taxes as a student ) Employee discounts Exempt3 up to certain limits. Filing taxes as a student (See Employee Discounts , later in this section. Filing taxes as a student ) Employee stock options See Employee Stock Options , later in this section. Filing taxes as a student Employer-provided cell phones Exempt if provided primarily for noncompensatory business purposes. Filing taxes as a student Group-term life insurance coverage Exempt Exempt1,4, 7 up to cost of $50,000 of coverage. Filing taxes as a student (Special rules apply to former employees. Filing taxes as a student ) Exempt Health savings accounts (HSAs) Exempt for qualified individuals up to the HSA contribution limits. Filing taxes as a student (See Health Savings Accounts , later in this section. Filing taxes as a student ) Lodging on your business premises Exempt1 if furnished for your convenience as a condition of employment. Filing taxes as a student Meals Exempt if furnished on your business premises for your convenience. Filing taxes as a student Exempt if de minimis. Filing taxes as a student Moving expense reimbursements Exempt1 if expenses would be deductible if the employee had paid them. Filing taxes as a student 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). Filing taxes as a student (See Transportation (Commuting) Benefits , later in this section. Filing taxes as a student ) Exempt if de minimis. Filing taxes as a student Tuition reduction Exempt3 if for undergraduate education (or graduate education if the employee performs teaching or research activities). Filing taxes as a student Working condition benefits Exempt Exempt Exempt 1 Exemption does not apply to S corporation employees who are 2% shareholders. Filing taxes as a student 2 Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees. Filing taxes as a student 3 Exemption does not apply to certain highly compensated employees under a program that favors those employees. Filing taxes as a student 4 Exemption does not apply to certain key employees under a plan that favors those employees. Filing taxes as a student 5 Exemption does not apply to services for tax preparation, accounting, legal, or brokerage services. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Filing taxes as a student Also, show it in box 12 with code “C. Filing taxes as a student ” The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax. Filing taxes as a student Accident and Health Benefits This exclusion applies to contributions you make to an accident or health plan for an employee, including the following. Filing taxes as a student Contributions to the cost of accident or health insurance including qualified long-term care insurance. Filing taxes as a student Contributions to a separate trust or fund that directly or through insurance provides accident or health benefits. Filing taxes as a student Contributions to Archer MSAs or health savings accounts (discussed in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans). Filing taxes as a student 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. Filing taxes as a student Payments or reimbursements of medical expenses. Filing taxes as a student Payments for specific injuries or illnesses (such as the loss of the use of an arm or leg). Filing taxes as a student The payments must be figured without regard to any period of absence from work. Filing taxes as a student Accident or health plan. Filing taxes as a student   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. Filing taxes as a student The plan may be insured or noninsured and does not need to be in writing. Filing taxes as a student Employee. Filing taxes as a student   For this exclusion, treat the following individuals as employees. Filing taxes as a student A current common-law employee. Filing taxes as a student A full-time life insurance agent who is a current statutory employee. Filing taxes as a student A retired employee. Filing taxes as a student A former employee you maintain coverage for based on the employment relationship. Filing taxes as a student A widow or widower of an individual who died while an employee. Filing taxes as a student A widow or widower of a retired employee. Filing taxes as a student 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. Filing taxes as a student Special rule for certain government plans. Filing taxes as a student   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. Filing taxes as a student See section 105(j) for details. Filing taxes as a student Exception for S corporation shareholders. Filing taxes as a student   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student Exclusion from wages. Filing taxes as a student   You can generally exclude the value of accident or health benefits you provide to an employee from the employee's wages. Filing taxes as a student Exception for certain long-term care benefits. Filing taxes as a student   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. Filing taxes as a student 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. Filing taxes as a student However, you can exclude these contributions from the employee's wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. Filing taxes as a student S corporation shareholders. Filing taxes as a student   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. Filing taxes as a student 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. Filing taxes as a student Exception for highly compensated employees. Filing taxes as a student   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. Filing taxes as a student 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. Filing taxes as a student   A self-insured plan is a plan that reimburses your employees for medical expenses not covered by an accident or health insurance policy. Filing taxes as a student   A highly compensated employee for this exception is any of the following individuals. Filing taxes as a student One of the five highest paid officers. Filing taxes as a student An employee who owns (directly or indirectly) more than 10% in value of the employer's stock. Filing taxes as a student An employee who is among the highest paid 25% of all employees (other than those who can be excluded from the plan). Filing taxes as a student   For more information on this exception, see section 105(h) of the Internal Revenue Code and its regulations. Filing taxes as a student COBRA premiums. Filing taxes as a student   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). Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student The award must meet the requirements for employee achievement awards discussed in chapter 2 of Publication 535, Business Expenses. Filing taxes as a student Employee. Filing taxes as a student   For this exclusion, treat the following individuals as employees. Filing taxes as a student A current employee. Filing taxes as a student A former common-law employee you maintain coverage for in consideration of or based on an agreement relating to prior service as an employee. Filing taxes as a student 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. Filing taxes as a student Exception for S corporation shareholders. Filing taxes as a student   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student Exclusion from wages. Filing taxes as a student   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. Filing taxes as a student The excludable annual amount is $1,600 ($400 for awards that are not “qualified plan awards”). Filing taxes as a student See chapter 2 of Publication 535 for more information about the limit on deductions for employee achievement awards. Filing taxes as a student    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. Filing taxes as a student   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. Filing taxes as a student The part of the cost that is more than your allowable deduction (up to the value of the awards). Filing taxes as a student The amount by which the value of the awards exceeds your allowable deduction. Filing taxes as a student Exclude the remaining value of the awards from the employee's wages. Filing taxes as a student Adoption Assistance An adoption assistance program is a separate written plan of an employer that meets all of the following requirements. Filing taxes as a student It benefits employees who qualify under rules set up by you, which do not favor highly compensated employees or their dependents. Filing taxes as a student 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. Filing taxes as a student It does not pay more than 5% of its payments during the year for shareholders or owners (or their spouses or dependents). Filing taxes as a student 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. Filing taxes as a student You give reasonable notice of the plan to eligible employees. Filing taxes as a student Employees provide reasonable substantiation that payments or reimbursements are for qualifying expenses. Filing taxes as a student For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Filing taxes as a student The employee was a 5% owner at any time during the year or the preceding year. Filing taxes as a student The employee received more than $115,000 in pay for the preceding year. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student However, you cannot exclude these payments from wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. Filing taxes as a student For more information, see the Instructions for Form 8839, Qualified Adoption Expenses. Filing taxes as a student 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. Filing taxes as a student Use code “T” to identify this amount. Filing taxes as a student Exception for S corporation shareholders. Filing taxes as a student   For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student On-premises facility. Filing taxes as a student   The athletic facility must be located on premises you own or lease. Filing taxes as a student It does not have to be located on your business premises. Filing taxes as a student However, the exclusion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort. Filing taxes as a student Employee. Filing taxes as a student   For this exclusion, treat the following individuals as employees. Filing taxes as a student A current employee. Filing taxes as a student A former employee who retired or left on disability. Filing taxes as a student A widow or widower of an individual who died while an employee. Filing taxes as a student A widow or widower of a former employee who retired or left on disability. Filing taxes as a student 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. Filing taxes as a student A partner who performs services for a partnership. Filing taxes as a student De Minimis (Minimal) Benefits You can exclude the value of a de minimis benefit you provide to an employee from the employee's wages. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student Examples of de minimis benefits include the following. Filing taxes as a student Personal use of an employer-provided cell phone provided primarily for noncompensatory business purposes. Filing taxes as a student See Employer-Provided Cell Phones , later in this section, for details. Filing taxes as a student 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. Filing taxes as a student Holiday gifts, other than cash, with a low fair market value. Filing taxes as a student 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. Filing taxes as a student Meals. Filing taxes as a student See Meals , later in this section, for details. Filing taxes as a student Occasional parties or picnics for employees and their guests. Filing taxes as a student Occasional tickets for theater or sporting events. Filing taxes as a student Transportation fare. Filing taxes as a student See Transportation (Commuting) Benefits , later in this section, for details. Filing taxes as a student Employee. Filing taxes as a student   For this exclusion, treat any recipient of a de minimis benefit as an employee. Filing taxes as a student 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. Filing taxes as a student The services must be for a qualifying person's care and must be provided to allow the employee to work. Filing taxes as a student 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. Filing taxes as a student For more information, see Qualifying Person Test and Work-Related Expense Test in Publication 503, Child and Dependent Care Expenses. Filing taxes as a student Employee. Filing taxes as a student   For this exclusion, treat the following individuals as employees. Filing taxes as a student A current employee. Filing taxes as a student 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. Filing taxes as a student Yourself (if you are a sole proprietor). Filing taxes as a student A partner who performs services for a partnership. Filing taxes as a student Exclusion from wages. Filing taxes as a student   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. Filing taxes as a student   An employee can generally exclude from gross income up to $5,000 of benefits received under a dependent care assistance program each year. Filing taxes as a student This limit is reduced to $2,500 for married employees filing separate returns. Filing taxes as a student   However, the exclusion cannot be more than the smaller of the earned income of either the employee or employee's spouse. Filing taxes as a student 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. Filing taxes as a student For more information on the earned income limit, see Publication 503. Filing taxes as a student Exception for highly compensated employees. Filing taxes as a student   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. Filing taxes as a student   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Filing taxes as a student The employee was a 5% owner at any time during the year or the preceding year. Filing taxes as a student The employee received more than $115,000 in pay for the preceding year. Filing taxes as a student 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. Filing taxes as a student Form W-2. Filing taxes as a student   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. Filing taxes as a student Include any amounts you cannot exclude from the employee's wages in boxes 1, 3, and 5. Filing taxes as a student Report both the nontaxable portion of assistance (up to $5,000) and any assistance above the amount that is non-taxable to the employee. Filing taxes as a student Example. Filing taxes as a student   Company A provides a dependent care assistance flexible spending arrangement to its employees through a cafeteria plan. Filing taxes as a student In addition, it provides occasional on-site dependent care to its employees at no cost. Filing taxes as a student Emily, an employee of company A, had $4,500 deducted from her pay for the dependent care flexible spending arrangement. Filing taxes as a student In addition, Emily used the on-site dependent care several times. Filing taxes as a student The fair market value of the on-site care was $700. Filing taxes as a student 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). Filing taxes as a student 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. Filing taxes as a student Educational Assistance This exclusion applies to educational assistance you provide to employees under an educational assistance program. Filing taxes as a student The exclusion also applies to graduate level courses. Filing taxes as a student Educational assistance means amounts you pay or incur for your employees' education expenses. Filing taxes as a student These expenses generally include the cost of books, equipment, fees, supplies, and tuition. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student Nor do they include the cost of lodging, meals, or transportation. Filing taxes as a student Educational assistance program. Filing taxes as a student   An educational assistance program is a separate written plan that provides educational assistance only to your employees. Filing taxes as a student The program qualifies only if all of the following tests are met. Filing taxes as a student The program benefits employees who qualify under rules set up by you that do not favor highly compensated employees. Filing taxes as a student 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. Filing taxes as a student The program does not provide more than 5% of its benefits during the year for shareholders or owners. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student You give reasonable notice of the program to eligible employees. Filing taxes as a student Your program can cover former employees if their employment is the reason for the coverage. Filing taxes as a student   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Filing taxes as a student The employee was a 5% owner at any time during the year or the preceding year. Filing taxes as a student The employee received more than $115,000 in pay for the preceding year. Filing taxes as a student 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. Filing taxes as a student Employee. Filing taxes as a student   For this exclusion, treat the following individuals as employees. Filing taxes as a student A current employee. Filing taxes as a student A former employee who retired, left on disability, or was laid off. Filing taxes as a student 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. Filing taxes as a student Yourself (if you are a sole proprietor). Filing taxes as a student A partner who performs services for a partnership. Filing taxes as a student Exclusion from wages. Filing taxes as a student   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. Filing taxes as a student Assistance over $5,250. Filing taxes as a student   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. Filing taxes as a student Working condition benefits may be excluded from wages. Filing taxes as a student 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. Filing taxes as a student See Working Condition Benefits , later, in this section. Filing taxes as a student 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. Filing taxes as a student 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). Filing taxes as a student Employee. Filing taxes as a student   For this exclusion, treat the following individuals as employees. Filing taxes as a student A current employee. Filing taxes as a student A former employee who retired or left on disability. Filing taxes as a student A widow or widower of an individual who died while an employee. Filing taxes as a student A widow or widower of an employee who retired or left on disability. Filing taxes as a student 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. Filing taxes as a student A partner who performs services for a partnership. Filing taxes as a student Exclusion from wages. Filing taxes as a student   You can generally exclude the value of an employee discount you provide an employee from the employee's wages, up to the following limits. Filing taxes as a student For a discount on services, 20% of the price you charge nonemployee customers for the service. Filing taxes as a student For a discount on merchandise or other property, your gross profit percentage times the price you charge nonemployee customers for the property. Filing taxes as a student   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. Filing taxes as a student 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. Filing taxes as a student Exception for highly compensated employees. Filing taxes as a student   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. Filing taxes as a student All of your employees. Filing taxes as a student A group of employees defined under a reasonable classification you set up that does not favor highly compensated employees. Filing taxes as a student   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Filing taxes as a student The employee was a 5% owner at any time during the year or the preceding year. Filing taxes as a student The employee received more than $115,000 in pay for the preceding year. Filing taxes as a student 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. Filing taxes as a student Employee Stock Options There are three kinds of stock options—incentive stock options, employee stock purchase plan options, and nonstatutory (nonqualified) stock options. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student ” See Regulations section 1. Filing taxes as a student 83-7. Filing taxes as a student 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. Filing taxes as a student The former spouse, rather than the employee, is required to include an amount in gross income when the former spouse exercises the stock options. Filing taxes as a student See Revenue Ruling 2002-22 and Revenue Ruling 2004-60 for details. Filing taxes as a student You can find Revenue Ruling 2002-22 on page 849 of Internal Revenue Bulletin 2002-19 at www. Filing taxes as a student irs. Filing taxes as a student gov/pub/irs-irbs/irb02-19. Filing taxes as a student pdf. Filing taxes as a student See Revenue Ruling 2004-60, 2004-24 I. Filing taxes as a student R. Filing taxes as a student B. Filing taxes as a student 1051, available at www. Filing taxes as a student irs. Filing taxes as a student gov/irb/2004-24_IRB/ar13. Filing taxes as a student html. Filing taxes as a student For more information about employee stock options, see sections 421, 422, and 423 of the Internal Revenue Code and their related regulations. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student Noncompensatory business purposes. Filing taxes as a student   You provide a cell phone primarily for noncompensatory business purposes if there are substantial business reasons for providing the cell phone. Filing taxes as a student 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. Filing taxes as a student Cell phones provided to promote goodwill, boost morale, or attract prospective employees. Filing taxes as a student   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. Filing taxes as a student Additional information. Filing taxes as a student   For additional information on the tax treatment of employer-provided cell phones, see Notice 2011-72, 2011-38 I. Filing taxes as a student R. Filing taxes as a student B. Filing taxes as a student 407, available at  www. Filing taxes as a student irs. Filing taxes as a student gov/irb/2011-38_IRB/ar07. Filing taxes as a student html. Filing taxes as a student Group-Term Life Insurance Coverage This exclusion applies to life insurance coverage that meets all the following conditions. Filing taxes as a student It provides a general death benefit that is not included in income. Filing taxes as a student You provide it to a group of employees. Filing taxes as a student See The 10-employee rule , later. Filing taxes as a student It provides an amount of insurance to each employee based on a formula that prevents individual selection. Filing taxes as a student This formula must use factors such as the employee's age, years of service, pay, or position. Filing taxes as a student You provide it under a policy you directly or indirectly carry. Filing taxes as a student 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. Filing taxes as a student Determine the cost of the insurance, for this purpose, as explained under Coverage over the limit , later. Filing taxes as a student Group-term life insurance does not include the following insurance. Filing taxes as a student Insurance that does not provide general death benefits, such as travel insurance or a policy providing only accidental death benefits. Filing taxes as a student Life insurance on the life of your employee's spouse or dependent. Filing taxes as a student However, you may be able to exclude the cost of this insurance from the employee's wages as a de minimis benefit. Filing taxes as a student See De Minimis (Minimal) Benefits , earlier in this section. Filing taxes as a student 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. Filing taxes as a student See Regulations section 1. Filing taxes as a student 79-1 for details. Filing taxes as a student Employee. Filing taxes as a student   For this exclusion, treat the following individuals as employees. Filing taxes as a student A current common-law employee. Filing taxes as a student A full-time life insurance agent who is a current statutory employee. Filing taxes as a student An individual who was formerly your employee under (1) or (2). Filing taxes as a student 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. Filing taxes as a student Exception for S corporation shareholders. Filing taxes as a student   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student The 10-employee rule. Filing taxes as a student   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. Filing taxes as a student   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. Filing taxes as a student For example, count an employee who could receive insurance by paying part of the cost, even if that employee chooses not to receive it. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student Exceptions. Filing taxes as a student   Even if you do not meet the 10-employee rule, two exceptions allow you to treat insurance as group-term life insurance. Filing taxes as a student   Under the first exception, you do not have to meet the 10-employee rule if all the following conditions are met. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student You figure the coverage based on either a uniform percentage of pay or the insurer's coverage brackets that meet certain requirements. Filing taxes as a student See Regulations section 1. Filing taxes as a student 79-1 for details. Filing taxes as a student   Under the second exception, you do not have to meet the 10-employee rule if all the following conditions are met. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student Evidence of whether an employee is insurable does not affect an employee's eligibility for insurance or the amount of insurance that employee gets. Filing taxes as a student   To apply either exception, do not consider employees who were denied insurance for any of the following reasons. Filing taxes as a student They were 65 or older. Filing taxes as a student They customarily work 20 hours or less a week or 5 months or less in a calendar year. Filing taxes as a student They have not been employed for the waiting period given in the policy. Filing taxes as a student This waiting period cannot be more than 6 months. Filing taxes as a student Exclusion from wages. Filing taxes as a student   You can generally exclude the cost of up to $50,000 of group-term life insurance from the wages of an insured employee. Filing taxes as a student You can exclude the same amount from the employee's wages when figuring social security and Medicare taxes. Filing taxes as a student 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. Filing taxes as a student Coverage over the limit. Filing taxes as a student   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. Filing taxes as a student Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Filing taxes as a student Also, show it in box 12 with code “C. Filing taxes as a student ” The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax. Filing taxes as a student   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. Filing taxes as a student For all coverage provided within the calendar year, use the employee's age on the last day of the employee's tax year. Filing taxes as a student You must prorate the cost from the table if less than a full month of coverage is involved. Filing taxes as a student Table 2-2. Filing taxes as a student Cost Per $1,000 of Protection For 1 Month Age Cost Under 25 $ . Filing taxes as a student 05 25 through 29 . Filing taxes as a student 06 30 through 34 . Filing taxes as a student 08 35 through 39 . Filing taxes as a student 09 40 through 44 . Filing taxes as a student 10 45 through 49 . Filing taxes as a student 15 50 through 54 . Filing taxes as a student 23 55 through 59 . Filing taxes as a student 43 60 through 64 . Filing taxes as a student 66 65 through 69 1. Filing taxes as a student 27 70 and older 2. Filing taxes as a student 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. Filing taxes as a student Example. Filing taxes as a student Tom's employer provides him with group-term life insurance coverage of $200,000. Filing taxes as a student Tom is 45 years old, is not a key employee, and pays $100 per year toward the cost of the insurance. Filing taxes as a student Tom's employer must include $170 in his wages. Filing taxes as a student The $200,000 of insurance coverage is reduced by $50,000. Filing taxes as a student The yearly cost of $150,000 of coverage is $270 ($. Filing taxes as a student 15 x 150 x 12), and is reduced by the $100 Tom pays for the insurance. Filing taxes as a student The employer includes $170 in boxes 1, 3, and 5 of Tom's Form W-2. Filing taxes as a student The employer also enters $170 in box 12 with code “C. Filing taxes as a student ” Coverage for dependents. Filing taxes as a student   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. Filing taxes as a student 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. Filing taxes as a student The cost of the insurance is determined by using Table 2-2. Filing taxes as a student Former employees. Filing taxes as a student   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. Filing taxes as a student You are not required to collect those taxes. Filing taxes as a student 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. Filing taxes as a student Report those uncollected amounts separately in box 12 of Form W-2 using codes “M” and “N. Filing taxes as a student ” See the General Instructions for Forms W-2 and W-3 and the Instructions for Form 941. Filing taxes as a student Exception for key employees. Filing taxes as a student   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. Filing taxes as a student This exception generally does not apply to church plans. Filing taxes as a student When figuring social security and Medicare taxes, you must also include the entire cost in the employees' wages. Filing taxes as a student Include the cost in boxes 1, 3, and 5 of Form W-2. Filing taxes as a student 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. Filing taxes as a student   For this purpose, the cost of the insurance is the greater of the following amounts. Filing taxes as a student The premiums you pay for the employee's insurance. Filing taxes as a student See Regulations section 1. Filing taxes as a student 79-4T(Q&A 6) for more information. Filing taxes as a student The cost you figure using Table 2-2. Filing taxes as a student   For this exclusion, a key employee during 2014 is an employee or former employee who is one of the following individuals. Filing taxes as a student See section 416(i) of the Internal Revenue Code for more information. Filing taxes as a student An officer having annual pay of more than $170,000. Filing taxes as a student An individual who for 2014 was either of the following. Filing taxes as a student A 5% owner of your business. Filing taxes as a student A 1% owner of your business whose annual pay was more than $150,000. Filing taxes as a student   A former employee who was a key employee upon retirement or separation from service is also a key employee. Filing taxes as a student   Your plan does not favor key employees as to participation if at least one of the following is true. Filing taxes as a student It benefits at least 70% of your employees. Filing taxes as a student At least 85% of the participating employees are not key employees. Filing taxes as a student It benefits employees who qualify under a set of rules you set up that do not favor key employees. Filing taxes as a student   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. Filing taxes as a student   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. Filing taxes as a student S. Filing taxes as a student 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. Filing taxes as a student   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. Filing taxes as a student Your plan does not favor key employees just because the amount of insurance you provide to your employees is uniformly related to their pay. Filing taxes as a student S corporation shareholders. Filing taxes as a student   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. Filing taxes as a student When figuring social security and Medicare taxes, you must also include the cost of this coverage in the 2% shareholder's wages. Filing taxes as a student Include the cost in boxes 1, 3, and 5 of Form W-2. Filing taxes as a student 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. Filing taxes as a student Health Savings Accounts A Health Savings Account (HSA) is an account owned by a qualified individual who is generally your employee or former employee. Filing taxes as a student Any contributions that you make to an HSA become the employee's property and cannot be withdrawn by you. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student For more information about HSAs, visit the Department of Treasury's website at www. Filing taxes as a student treasury. Filing taxes as a student gov and enter “HSA” in the search box. Filing taxes as a student Eligibility. Filing taxes as a student   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. Filing taxes as a student 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. Filing taxes as a student   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. Filing taxes as a student Exceptions. Filing taxes as a student   An individual is not a qualified individual if he or she can be claimed as a dependent on another person's tax return. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student For more information, see Other employee health plans in Publication 969. Filing taxes as a student Employer contributions. Filing taxes as a student   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. Filing taxes as a student 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. Filing taxes as a student   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. Filing taxes as a student 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. Filing taxes as a student No contributions can be made to an individual's HSA after he or she becomes enrolled in Medicare Part A or Part B. Filing taxes as a student Nondiscrimination rules. Filing taxes as a student    Your contribution amount to an employee's HSA must be comparable for all employees who have comparable coverage during the same period. Filing taxes as a student Otherwise, there will be an excise tax equal to 35% of the amount you contributed to all employees' HSAs. Filing taxes as a student   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. Filing taxes as a student 4980G-4. Filing taxes as a student Exception. Filing taxes as a student   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. Filing taxes as a student A highly compensated employee for 2014 is an employee who meets either of the following tests. Filing taxes as a student The employee was a 5% owner at any time during the year or the preceding year. Filing taxes as a student The employee received more than $115,000 in pay for the preceding year. Filing taxes as a student 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. Filing taxes as a student Partnerships and S corporations. Filing taxes as a student   Partners and 2% shareholders of an S corporation are not eligible for salary reduction (pre-tax) contributions to an HSA. Filing taxes as a student 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. Filing taxes as a student Cafeteria plans. Filing taxes as a student   You may contribute to an employee's HSA using a cafeteria plan and your contributions are not subject to the statutory comparability rules. Filing taxes as a student However, cafeteria plan nondiscrimination rules still apply. Filing taxes as a student For example, contributions under a cafeteria plan to employee HSAs cannot be greater for higher-paid employees than they are for lower-paid employees. Filing taxes as a student Contributions that favor lower-paid employees are not prohibited. Filing taxes as a student Reporting requirements. Filing taxes as a student   You must report your contributions to an employee's HSA in box 12 of Form W-2 using code “W. Filing taxes as a student ” 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. Filing taxes as a student 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. Filing taxes as a student It is furnished on your business premises. Filing taxes as a student It is furnished for your convenience. Filing taxes as a student The employee must accept it as a condition of employment. Filing taxes as a student Different tests may apply to lodging furnished by educational institutions. Filing taxes as a student See section 119(d) of the Internal Revenue Code for details. Filing taxes as a student The exclusion does not apply if you allow your employee to choose to receive additional pay instead of lodging. Filing taxes as a student On your business premises. Filing taxes as a student   For this exclusion, your business premises is generally your employee's place of work. Filing taxes as a student 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. Filing taxes as a student For your convenience. Filing taxes as a student   Whether or not you furnish lodging for your convenience as an employer depends on all the facts and circumstances. Filing taxes as a student 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. Filing taxes as a student This is true even if a law or an employment contract provides that the lodging is furnished as pay. Filing taxes as a student However, a written statement that the lodging is furnished for your convenience is not sufficient. Filing taxes as a student Condition of employment. Filing taxes as a student   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. Filing taxes as a student Examples include employees who must be available at all times and employees who could not perform their required duties without being furnished the lodging. Filing taxes as a student   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. Filing taxes as a student Example. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student S corporation shareholders. Filing taxes as a student   For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student Meals This section discusses the exclusion rules that apply to de minimis meals and meals on your business premises. Filing taxes as a student 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. Filing taxes as a student The exclusion applies, for example, to the following items. Filing taxes as a student Coffee, doughnuts, or soft drinks. Filing taxes as a student Occasional meals or meal money provided to enable an employee to work overtime. Filing taxes as a student However, the exclusion does not apply to meal money figured on the basis of hours worked. Filing taxes as a student Occasional parties or picnics for employees and their guests. Filing taxes as a student 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. Filing taxes as a student 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. Filing taxes as a student If food or beverages you furnish to employees qualify as a de minimis benefit, you can deduct their full cost. Filing taxes as a student The 50% limit on deductions for the cost of meals does not apply. Filing taxes as a student The deduction limit on meals is discussed in chapter 2 of Publication 535. Filing taxes as a student Employee. Filing taxes as a student   For this exclusion, treat any recipient of a de minimis meal as