Vision Payroll

The Internal Revenue Service (IRS) recently released Information Letter 2010-0146, which answers “several questions about the tax consequences of certain employer-provided transportation benefits.” Among the issues the IRS addressed are the ability to perform, and the repercussions of, rollovers of unused benefits on smartcards, limits on the amounts of rollovers or accumulations, the definition of a commuter, the requirement to use transit passes only for commuting and only by employees, as well as several other guideline questions. Vision Payroll recommends that employers providing such benefits review their plans and procedures with their attorney to ensure compliance with the latest guidance.

In a response to Senator Dianne Feinstein (D-CA), the Internal Revenue Service (IRS), in Information Letter 2010-0001, explains how to determine if a worker is an employee for federal income tax withholding purposes.

The determination of employee or independent contractor status is a question of facts and circumstances. According to the IRS response, “[t]he regulations that provide the criteria for determining an individual’s status as an employee or independent contractor for income tax withholding purposes are found in section 31.3401(c)-1 of the Employment Tax Regulations.

The designation of a worker as an employee or independent contract by either or both parties is not relevant to the determination of the worker’s status. The determination comes down to who has the right to direct and control the individual performing the work not only to the result, “but also as to the details and means by which that result is accomplished.” Relevant facts to make the determination generally fall into one these three categories:

1. Behavioral controls,
2. Financial controls, and
3. The relationship of the parties.

The IRS recommends preparing and filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, if a determination is needed of a particular worker’s status.

State laws for income tax withholding, unemployment taxes, or workers’ compensation may have different rules for determining if an employer-employee relationship exists. Due to increased enforcement and significant penalties for misclassification, Vision Payroll strongly recommends employers consult with a competent labor law attorney to help determine status of workers as employees or independent contractors.

In a response to Senators Richard Durbin (D-IL) and Barack Obama (D-IL), the Internal Revenue Service, in Information Letter 2009-0012, explains why employees who terminate employment are not entitled to receive any remaining balance in their transit reimbursement accounts.

Employees may voluntarily elect under §132 of the Internal Revenue Code of 1986 (IRC) to contribute a portion of their earnings to transit reimbursement accounts. Employees are technically not purchasing the benefit themselves, since doing so would require them to receive taxable compensation. The legal form of the transaction is that the employees are given a choice between cash compensation and the benefit provided by the employer. Once employees elect to have the benefit provided by their employers, employees are “no longer entitled to receive that compensation.” If the employees could choose to receive cash compensation, the entire value of the fringe benefit and cash compensation received would be taxable. Since employees forfeit their right to receive cash compensation when electing the fringe benefit, unused balances at termination of employment are funds of the employer, not the employee.

Contact Vision Payroll if you have any questions on qualified transportation fringe benefits under IRC §132.

Responding to a request from Senator Richard Shelby (R-Ala.), the IRS stated that there is no dollar limit imposed by law on de minimis fringe benefits. A constituent had written to Shelby and stated that the constituent’s employer required all non-cash gifts valued over $50 to be processed through payroll and all required taxes to be withheld. According to §132(e)(1) of the Internal Revenue Code of 1986 (as amended), “‘de minimis fringe’ means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.” Setting of a dollar limit would, in of itself, require accounting for items. Therefore, no dollar limit on de minimis fringe benefits is set by law. Treasury Regulations §1.132-6(e) gives examples of de minimis fringe benefits such as “occasional typing of personal letters by a company secretary; occasional personal use of an employer’s copying machine, provided that the employer exercises sufficient control and imposes significant restrictions on the personal use of the machine so that at least 85 percent of the use of the machine is for business purposes; occasional cocktail parties, group meals, or picnics for employees and their guests; traditional birthday or holiday gifts of property (not cash) with a low fair market value; occasional theater or sporting event tickets; coffee, doughnuts, and soft drinks; local telephone calls; and flowers, fruit, books, or similar property provided to employees under special circumstances (e.g., on account of illness, outstanding performance, or family crisis).” Contact Vision Payroll if you have any questions.