JUNE 25TH, 2010
By CPA SAM
Q. My question is: I work for a school. Sometimes parents gift money or gift cards at holiday time or for an appreciation event. Are these taxable. How about gift cards from a school committee (holiday drawing etc.) Even a child will offer a dollar in a card. If they are I am really upset. These are given from the heart, and not meant to be a burden. But I must know, as I’ve gotten different answers from different sources. thanks so much!
A. There are two things that come to mind in answering your question. First, money given to a teacher from a child would generally not be considered taxable. This would fall under the gift provisions of the IRS code. Most children will give a $10 or $20 gift or gift card. Unless the parent of the child is an employer of the teacher as well, there is probably no tax liability created by this gift. If the child gives a large, extravagant gift to the teacher, it would be best to consult with a tax advisor regarding the potential liability issues in this case.
Let’s say the same class of students decided to be very efficient. Instead of donating 25 or 30 different gifts cards or cash items to a teacher, they instead collected money and donated to the school. The school was instructed to pay this to the teacher as a lump sum. In this scenario, the gift idea is thrown out the window. Now the money transfers as part of an employee/employer relationship and must be considered income because the school is the employer. The employer will either need to withhold on the payment or “gross up” the payment and pay the taxes on behalf of the employee. This is the same as providing gift cards to teachers in lieu of cash. I wrote about that topic in another blog article here.
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Samuel Kerch, CPA
Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.
MARCH 24TH, 2010
By CPA SAM
Q. A 2% shareholder of an s corporation is also an emploeye. The corporation offers health insurance under a premium only 125 cafeteria plan. Is the shareholder/employee eligible to participate? If so should the corporation’s contribution be reported as wages?
A. There are lots of good articles already on the web about 2% shareholders of S corporations. These would of course be secondary resources on the topic but they can provide coverage from the perspective of those who work in this field every day.
The key is that the IRS considers an S corp to be a partnership when dealing with employee fringe benefits. If the company pays for the health insurance of a 2% shareholder, it is allowed to take a deduction for that benefit. The full amount of that premium would be considered taxable income to the shareholder/employee. So…yes, a shareholder can participate in the plan, but cannot get pre-tax treatment like the rest of the employees would under a section 125 or “cafeteria plan”.
Some states do not allow single person health plans to be purchased as a business. If the 2% shareholder is the only shareholder in the S corp, then perhaps he should consider hiring his spouse to enable them to purchase a business plan. Otherwise, health insurance must be purchased as an individual and can only be deducted once it passes 7.5% of AGI on the tax return if the individual itemizes.
The IRS published a bulletin about this topic that goes into much more detail. It is IRB 2008-2 and can be found here.
NOVEMBER 18TH, 2009
By CPA SAM
Q. We have an employee who is working on an extended assignment (1+ years) in another state. This is not the state of his residence. My company is paying his apartment rent. Is this taxable income to the employee?
A. That is a very good question. In these turbulent economic times, employees are more apt to accept unique arrangements like this just so they can keep their job. I see two issues at work here. First, what amount of time is required before the employment state considers him a resident? Second, is the employee living on-site at a business location. Why do these questions matter?
Because I’m in Arizona and you did not mention which states are involved, I will use an Arizona example. According to Arizona Income Tax Procedure (ITP) 92-1, if an employee is in the state for longer than 9 months, he is considered a resident. Your employee is probably considered a resident of the state where he is working as well. That means, he has technically relocated. Unless he is residing on the premises of your business location (like a storage unit manager), any rent or mortgage that you pay on his behalf is taxable income to that employee and must be included in wages on the W-2. He may also be subject to tax withholding in the state where he originally resided. Check with a local tax advisor or CPA for details and guidance. A good summary of this issue can be found in the Guide to Fringe Benefits, Publication 15-b from the IRS.
On a side note, if you read this page, you will see the minimum amount of time required to pass before an employee needs to have Arizona withholding. In your example, the employee is staying in the state much longer than the required 60 days. Therefore, you would definitely have to withhold if this situation occurred in Arizona. As you can see, withholding requirements normally begin much earlier than residency rules. Check with the state that applies to your situation to see its requirements.
FEBRUARY 18TH, 2009
By CPA SAM
Q. I’m doing my own taxes this year. I can’t seem to remember how much my stimulus payment was back in 2008. How do I find this amount?
A. This is the most common question asked to me this year. Apparently, the government stimulus payment received by taxpayers last year was not very stimulating. No one can rememer how much they received. Thankfully, the IRS has an online tool available that lets you determine how much you received. You can find it here. You will need to know the social security number of the primary filer of your tax returns, the marital status on your 2007 tax return and the number of exemptions claimed on your tax return. Once you enter all of this information, you can se how much you received.
Everyone received a mailer from the IRS explaining the amount earlier in 2008. Hopefully you kept that document. It will be useful when preparing your return. If you utilize the services of a professional tax preparer, you will also need to give it to him/her to properly complete your return. Remember, the stimulus payment is not taxable income so it does not need to be claimed somewhere on your return. The purpose of identifying the amount you received is to determine if you are owed an extra cash.
On a side note, remember all the advantages of filing with a professional preparer. Professionals…
- utilize state of the art software to handle all new tax laws and track changes to your situation year over year
- are studied up and trained in changes and can make recommendations based on your situation
- can answer questions throughout the year if an unexpected financial situation occurs
- can answer what-if questions to help you make the right decisions without running fake tax returns
- are more flexible and can make judgment calls based on their experiences. Software can’t do this!
- have time and experience to handle complex returns that simply are too confusing for the common taxpayer
So…if you want to take the risk and hassle out of tax preparation, contact your local professional. And…if you already use a preparer and are happy with them, tell your friends!!
JANUARY 19TH, 2009
By CPA SAM
Q. I gave all my employees gift cards this year as a holiday present. Is that taxable?
A. Yes! This is a never-ending debate in the payroll departments of America. The debate heats up each year at holiday time. The gift card was given to your employees. This means the gift is based on the employer/employee relationship. Each card has value and is essentially cash to a store of some kind. Whenever cash is exchanged, it is a taxable transaction to an employee. The argument is always that gift cards or cash under $50 in value are Read more »
DECEMBER 10TH, 2008
By CPA SAM
Q. I not quite 66 and married, and am ready to file for my retirement benefits with Social Security. What are some of the issues I will face? Will I be taxed on my benefits?
A. Filing for Social Security is one of those big milestones like the day your AARP packet arrives. You start to wonder how time went by so quickly. This is again one of the most frequent questions I hear. Many retirees are confused about what actually happens and the best way to manage their benefits.
The Social Security Administration has a very good chart available that explains Read more »
Q. What does the box mean on the W-4 Form that says “Married but withhold at higher single rate?”
A. This is one of the most frequent questions I get. The answer lies in an understanding of federal withholding. There are two withholding tables used by employers to withholding federal tax. One is for those who check the box “Single” in the W-4. The second table is related to those who check the box for “Married” on the W-4. There are also two income tax tables: Married and Single. The selection you make on the Form W-4 tells Read more »
