1.
Wages and other compensation
Wages subject to Federal employment taxes include all pay1 you give to an employee for services performed. Also, compensation paid to a former employee for services performed while still employed is wages subject to employment taxesi. The Employer's Supplemental Tax Guide provides additional information on wages including:
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Awards
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Educational Assistance
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Outplacement services
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Retirement plans
The social security and Medicare tax rates for three prior years are as follows:
Calendar Year and FICA Component | Wage Base Limit (each employee) | Tax Rate |
1999 - Social Security | $72,600 | 12.4% |
1999 - Medicare | All Wages | 2.9% |
1998 - Social Security | $68,400 | 12.4% |
1998 - Medicare | All Wages | 2.9% |
1.1
Employee Business Expense Reimbursements
A reimbursement or allowance arrangement is a system by which you substantiate and pay the advances, reimbursements and charges for your employees' business expenses.
1.1.1
Accountable Plan
To be an accountable plan, your reimbursement or allowance arrangement must require your employees to meet all three of the following rules.
1.
They must have paid or incurred deductible expenses while performing services as your employees. Any reimbursement or allowance that does not meet these criteria does not qualify. For example, if the expenses were incurred during an activity that was not job-related, or after their employment was terminated, then those expenses do not qualify.
2.
They must adequately account to you for these expenses within a reasonable period of time.
3.
They must return any amounts in excess of expenses within a reasonable period of time.
Amounts paid under an accountable plan are not wages and are not subject to income tax witholding.
1.1.2
Nonaccountable Plan
Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and subject to income tax witholding. Your payments are treated as paid under a nonaccountable plan if:
1.
Your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation; or
2.
You advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount he or she does not use for business expenses
1.1.3
Per diem or other fixed allowance
You may reimburse your employees by travel days, or miles, or some other fixed allowance. In these cases, your employee is considered to have accounted to you if the payments do not exceed rates established by the Federal Governmentii. Other than the amount of these expenses, your employees' business expenses must be substantiated2 for audit purposes.
1.2
Wages not paid in money
If in the course of your trade or business you pay your employees in a medium that is neither cash nor a readily negotiable instrument such as a check, you are said to pay them in kind. The fair market value of such payments is subject to income tax.
2.
Tips and Gratuities
Tips your employee receives from customers are generally subject to witholding. Your employee must report cash tips to you by the 10th. of the month after the month the tips are received. This statement must be signed by the employee and must show the following:
1.
The employee's name, address and social security number.
2.
Your name and address.
3.
The month or period the report covers.
4.
The total tips.
Note: You are permitted to establish a system for electronic tip reportingiii by employees.
2.1
Allocated Tips
If you operate a large food or beverage establishment3, you must report allocated tips under certain circumstances. However, do not withold income taxes on allocated tips.
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1 The pay may be in cash or in other forms. It includes salaries, vacation allowances, bonuses, commissions and fringe benefits. It does not matter how you measure or make the payments.
2 For example, the business purpose of the travel or the number of business miles driven must be substantiated by appropriate records.
3 A large food or beverage establishment is one that provides food or beverages for consumption on the premises, where tipping is customary, and where there are normally more than 10 employees on a typical business day during the preceding year.
i Circular E, Employer's Tax Guide, Publication 15, Cat. No. 10000W. Section 6. Dept. of the Treasury, Internal Revenue Service.
ii Per diem rates, Publication 1542. Dept. of the Treasury, Internal Revenue Service.
iii Proposed Regulations, Publication 15, Cat. No. 10000W. Dept. of the Treasury, Internal Revenue Service.