Under IRC 61 gross income is defined as “…all income from whatever source derived, including (but not limited to) compensation for services, including fees, commissions, fringe benefits, and similar items…” IRS Regulations 1.61-1 further explains that “…gross income means all income from whatever source derived unless excluded by law. Gross income includes income realized in any form, whether in money, property or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as cash.” These definitions mean that all employee compensation, provided in whatever form, is taxable unless the IRC has deemed the compensation to be not taxable. In general, the same guidelines apply to withholding income, social security, and Medicate taxes. IRS Publication 15-B has a complete discussion on taxation of fringe benefits:

o   Accident and Health Benefits: Contributions employer makes to an accident or health plan for an employee.

o   Achievement Awards: The value of any tangible personal property employer gives to an employee as an award for either length of service or safety achievement.

o   Adoption Assistance: It benefits employees who qualify under rules set up by employer, which do not favor highly compensated employees or their dependents. To determine whether your plan meets this test, refer to Publication 15-B.

o   Athletic Facilities.

o   De Minimis (Minimal) Benefits.

 o   Dependent Care Assistance

o   Educational Assistance.

o   Employee Discounts

o   Employee Stock Options

o   Group-Term Life Insurance Coverage.

o   Health Savings Accounts

o   Lodging on Your Business Premises

o   Meals

o   Moving Expenses Reimbursements

o   Retirement Planning Services

o   Transportation (Commuting) Benefits.

o   Tuition Reduction.

o   Volunteer Firefighter and Emergency Medical Responder Benefits.

o   Working Condition Benefits



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Supplemental Wage Payments

Some employers pay special payments throughout the year that are not part of their employee’s regular wages. If these wages are combined with the regular wages, the federal income tax required  to be withheld as “supplemental wages” could be higher than the standard amount. So, the IRS defines these wages. They may be paid at the same time as regular wages or at any other time. The IRS issued final regulations in July 2006 to determine the method and amount of income tax withholding  on supplemental wages including the new, higher flat rate applied to supplemental wages exceeding $1 million in a calendar year. These final regulations apply to payments made on or after January 1, 2007. Examples of Supplemental Wages: Commissions Paid at Fixed Intervals with no Regular Wages Paid to the employee, Commissions Paid at Fixed Intervals in Addition to Regular Wages Paid at Different Intervals, Draws Paid in Connection with Commissions, Commissions Paid to the Employee Only When the Employee’s Accumulated Commission Credit Reaches a Specific Numerical Threshold, Signing Bonus Paid to the Commenced of Employment, Severance Pay Paid After the Termination of Employment, Lump Sum Payment of Accumulated Annual Leave, Annual Payments of Vacation and Sick Leave, Sick Pay Paid at a Different Rate than Regular Pay.

Qualified Moving Expense Reimbursements.

Employer reimbursements for an employee’s moving expenses are treated as fringe benefit excludable from the employee’s gross income and wages if: the expenses would be deductable by the employee if he or she had directly paid or incurred the expenses, and the employee did not deduct the expenses in a prior year. In addition, the reimbursements should be made under rules similar to those relating  to an accountable plan. If the plan does not meet the accountable plan rules for business travel expense, then all reimbursements must be included in the employee’s income.

Personal Use of Company Cars

Although the business use of a company-owned vehicle is excluded from taxable income (based on the employee’s documentation of the business use), the personal use of the company vehicle is taxable compensation. The employer may elect not to withhold federal income tax on the personal use of the vehicle, but federal wages must be reported and social security and Medicare taxes must be withheld on the value of personal use.

Group Term Life Insurance/Imputed Income.

Employer-provided group-term life insurance coverage with a value of $50,000 or less is a tax-free benefit to the employee if it is provided in a nondiscriminatory fashion. The value of the coverage in excess of $50,000, less any  employee after-tax payroll deductions, is taxable income. The employer is not required to withhold federal income tax on the taxable group-term life insurance, but the value is subject to federal taxation and must be reported on the employee’s Form W-2 as “other compensation”.  The amount of benefit to be taxed is based on the amount of insurance and the employees age.