I love this excerpt from Abbott and Costello’s “Who’s on First?”
Lou: When you pay off the first baseman every month, who gets the money?
Bud: Every dollar of it! And why not, the man's entitled to it.
Lou: Who is?
Lou: So who gets it?
Bud: Why shouldn't he? Sometimes his wife comes down and collects it.
Lou: Whose wife?
Bud: Yes. After all, the man earns it.
Lou: Who does?
Lou: All I'm trying to find out is what's the guy’s name on first base.
Bud: Oh, no, no, What is on second base.
Lou: I'm not asking you who's on second.
Bud: Who's on first.
Lou: That's what I'm trying to find out!*
Ever feel like this when processing payroll, especially when trying to determine what is taxable income? You are not alone. This is one of our frequently asked payroll questions.
Who’s on First?
To begin with, let’s look at some basics. Most business owners know that compensation can take many forms, not just a paycheck. No matter what it is called; commission, wage, fee, reimbursement; if you are giving something of value to an employee as compensation for services it a potential taxable event.
What’s on Second?
Let’s take a look at what is generally considered taxable:
Bonuses or cash equivalents: This includes gift certificates (cash equivalents). These items must always be reported as salary or extra wages and therefore are taxable.
Company car for personal use: If you provide a company vehicle for your employees and they use it for personal and company business, it may be subject to taxation.
Tips and other prizes: Performance related prizes are great motivators for employees to reach sales or income goals. If these prizes are given in the form of goods or services, they must be reported with an employee’s income at the fair market value.
Services: Many employers provide their employees certain services as a benefit. Services such as legal, counseling, accounting etc. should be reported as a salary or wage.
I Don’t Know is on Third
So now that we know what is taxable, let’s look in general at what isn’t. Like all things tax related, there may be some exceptions to this list, so it always good to check with us about your specific situation. **
- Educational Reimbursements up to a max of $25,000/year.
- Relocation moving expenses that the employee could deduct if they hadn’t been reimbursed.
- Specific insurance premiums including up to $50,000 in group life insurance coverage, accident and health benefits, and employer’s share of COBRA contributions.
- Minimal value gifts or awards such as plaques or trophies.
- Discounts of up to 20% on employer provided goods or services.
- Retirement planning services that are offered as part of a qualified retirement plan.
- Meals or lodging provided on work site, if specific guidelines are met.
- Using a company van for commuting, provided specific guidelines are met.
- Up to $130 per month worth of transportation-related fringe benefits such as commuter passes and up to $250 per month for subsidized parking.
That’s What I am Trying to Find Out!
Successful employees make successful businesses, so knowing what is and isn’t taxable is crucial when making business employment decisions. Just like each business is unique, your employment taxation can look much different than anyone else. Let us take a look at your situation and make sure that who’s on first, should be there!
*From Abbott and Costello’s famous comedy routine “Who’s on First?”.
**From “What to Know About Employee Reimbursement Taxes” from Paychex.