Enrolled Agent > EA - Part 2: Businesses > Unit 5: Employee Compensation and Fringe Benefits > Flashcards

Unit 5: Employee Compensation and Fringe Benefits Flashcards

Understand wage rules and common fringe benefits for employees. (78 cards)

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1
Q

What are the conditions for an employer to deduct employee compensation expenses on their taxes?

A
  • Payments must be necessary and directly related to business operations.
  • Amounts must be reasonable according to industry standards.
  • Proof that services were actually performed must be provided.
  • Expenses must have been incurred during the tax year in question.
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2
Q

What are considered supplemental wages?

A
  • Holiday bonuses
  • Commissions
  • Overtime pay
  • Taxable awards
  • Payments for accumulated sick leave
  • Back pay
  • Retroactive pay increases
  • Severance pay
  • Nondeductible moving expenses

Supplemental wages are additional forms of compensation given to employees on top of their regular salary or wages.

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3
Q

How is property given as compensation to an employee treated for tax purposes?

A

It is considered an alternative form of taxable compensation, calculated using the fair market value at the time of payment. The business recognizes a gain or loss on the transfer equal to the difference between the fair market value and its basis in the property.

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4
Q

What must a business do when it pays an independent contractor more than $600 in a year?

A

File Form 1099-NEC, Nonemployee Compensation, to report the payments to the IRS and provide a copy to the contractor.

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5
Q

What payroll-related taxes can a business deduct as part of employee compensation?

A
  • Employer’s share of Social Security and Medicare taxes
  • State and federal unemployment taxes
  • Disability fund taxes
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6
Q

What is a fringe benefit?

A

Any cash, property, or service that an employee receives in addition to regular taxable wages.

It is a type of compensation that may be offered by a business to make positions more desirable for employees.

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7
Q

What are examples of nontaxable fringe benefits?

A
  • Health insurance premiums paid by the employer
  • use of a company car for business-related errands
  • subsidized meals
  • employee discounts
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8
Q

What are examples of taxable fringe benefits?

A
  • Off-site athletic facilities and health club memberships
  • Concert and athletic event tickets
  • Intangible property such as vacations, stocks, or securities
  • Value of employer-provided life insurance over $50,000
  • Cash benefits in the form of a credit card or gift card
  • Transportation benefits exceeding a specified nontaxable limit
  • Employer-provided vehicles used for personal purposes or commuting
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9
Q

How are health and accident insurance premiums treated for an S corporation shareholder with more than 2% ownership?

A

The S corporation can deduct the premiums as wages. They are included in the shareholder’s taxable income for income tax purposes but are not subject to Social Security, Medicare, or FUTA taxes.

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10
Q

What is a cafeteria plan?

A

A written benefit package that allows employees to choose between receiving one taxable benefit, such as cash, and one qualified (nontaxable) benefit.

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11
Q

What are the IRS nondiscrimination rules for cafeteria plans?

A

Cafeteria plans must not favor highly compensated employees or key employees over other employees in terms of eligibility, contributions, or benefits.

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12
Q

What is a key employee under nondiscrimination rules?

A
  • An individual meeting the 5% owner test - Owns more than 5% of the business.
  • An individual meeting the over 1% owner test - Owns more than 1% of the business and has annual compensation over $150,000 (not indexed).
  • A company officer with compensation over $230,000 for 2025.
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13
Q

What are the family attribution rules for ownership tests in determining key employee status?

A

Family attribution rules require including stock owned by:

  • Spouse
  • Children
  • Grandchildren
  • Parents

These rules apply to the more than 5% and more than 1% ownership tests.

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14
Q

What is the definition of a highly compensated employee (HCE)?

A

An individual who is:

  • More than 5% shareholder or owner of the company; or
  • Highly-compensated employee based on facts and circumstances, specifically having earned more than $160,000 in 2025

Family attribution rules also apply to HCE status, and HCEs hired mid-year achieve status starting the following year.

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15
Q

True or False:

An employee can be classified as both a highly compensated employee and a key employee.

A

True

An employee may be both an HCE and a key employee in the same plan year, depending on ownership and compensation criteria.

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16
Q

How does ownership affect classification as a key employee or HCE?

A

Persons who own more than 5% of a company are considered both highly compensated employees and key employees.

Ownership can impact classification regardless of salary.

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17
Q

What are the consequences if a cafeteria plan fails discrimination testing in favor of HCEs and key employees?

A

The benefits received by HCEs and key employees will lose favorable tax treatment and become taxable.

Non-key employees are not affected by the loss of favorable tax treatment.

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18
Q

What is the exclusion limit for group-term life insurance as a nontaxable fringe benefit?

A

The cost of the first $50,000 of group-term life insurance coverage is excludable from taxable income.

Coverage exceeding $50,000 must be included in the employee’s taxable income.

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19
Q

What is an HSA?

A

A health savings account owned by the employee, paired with a high-deductible health plan.

Unlike FSAs, HSAs are vested and portable, moving with the employee if they change jobs or leave the workforce.

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20
Q

What are the contribution limits for Health Savings Accounts (HSAs) in 2025?

A
  • $4,300 for self-only coverage
  • $8,550 for family coverage
  • Additional $1,000 for participants age 55 or older

Catch-up contributions can be made any time during the year the participant turns 55.

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21
Q

Fill in the blanks:

Flexible Spending Accounts (FSAs) are a type of employee benefit program that allows for reimbursement of expenses using ______ ______.

A

pre-tax dollars

FSAs enable participants to cover out-of-pocket costs with pre-tax dollars.

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22
Q

What is the limit for a Dependent Care FSA in 2025?

A

$5,000 per calendar year, per family ($2,500 if MFS).

The exclusion cannot exceed the smaller of the earned income of either the employee or, if married, the employee’s spouse.

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23
Q

What types of expenses can a Dependent Care FSA be used for?

A

Expenses for the care of a qualifying dependent so the taxpayer can work, such as daycare or similar care services.

A “qualifying dependent” is generally a child under age 13, a disabled spouse, or a dependent parent in eldercare.

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24
Q

What is the contribution limit for Health Care FSAs in 2025?

A

$3,300

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25
What options do employers have for unused Health Care FSA funds?
* Carryover * Grace period ## Footnote The carryover option allows for a maximum carryover of 20% of the maximum available salary reduction, and the grace period can be up to two-and-a-half months.
26
# True or False: An Flexible Spending Account (FSA) can have both a carryover and a grace period.
False ## Footnote An FSA can have one or the other or neither, at the employer’s discretion.
27
What is the maximum reimbursement amount for a **QSEHRA** in 2025?
* $6,350 for self-only coverage * $12,800 for family coverage ## Footnote Qualified Small Employer Health reimbursement Arrangement (QSEHRA)
28
Can **employees** contribute to a QSEHRA?
No ## Footnote A QSEHRA can only be funded by the employer.
29
What is a '**working condition fringe**' benefit?
A benefit given by employers to help employees carry out their job duties. ## Footnote Examples include membership fees for professional organizations, continuing education courses, and protective gear.
30
What are '**qualified nonpersonal-use**' vehicles?
Vehicles unlikely to be used more than minimally for personal purposes. ## Footnote Examples include fire trucks, police cars, hearses, school buses, cement mixers, and tractors.
31
What are the requirements for employees to receive **tax-free reimbursements** under an accountable plan?
* Incur expenses while performing their duties * Provide timely and detailed records * Submit documentary evidence.
32
What happens if a reimbursement policy **does not meet** accountable plan criteria?
The reimbursements become taxable to the employee as wages.
33
What is the exclusion limit for **nonqualified plan awards**, and how does it change if the employee also receives qualified awards?
The exclusion limit for nonqualified plan awards is $400. If an employee also receives qualified plan awards in the same year, the combined exclusion limit is $1,600. ## Footnote Qualified awards are length-of-service or safety achievement awards that meet specific IRS rules, such as being part of a written plan that doesn’t favor highly compensated employees and not exceeding the dollar limits.
34
What items are **not** considered 'tangible personal property' for employee achievement awards?
* Cash * Cash equivalents * Gift cards * Gift certificates * Tickets * Vacations * Meals * Lodging * Stocks * Bonds * Securities
35
Are employer-paid gym memberships at off-site locations **taxable**?
Yes ## Footnote The value must be included in the employee’s compensation.
36
Under what **condition** can the value of an employee’s use of a health club be excluded from wages?
The facility must be on premises that the employer owns or leases. ## Footnote If the employer pays for a gym membership or a fitness program provided to the employee at an off-site location, the value must be included in the employee’s compensation.
37
What qualifies as a **de minimis benefit**?
A benefit of such little value that accounting for it would be impractical, like coffee or doughnuts in a break room. ## Footnote Cash and cash equivalent items, such as gift cards, are not excludable as de minimis benefits.
38
What is the **50% meal limit** in relation to de minimis fringe benefits?
Employers can only deduct 50% of the expenses for food or beverage provided as a de minimis fringe benefit. ## Footnote Meals provided at an on-site employee cafeteria or snacks in a break room are examples subject to this limit.
39
When can **meals** be provided tax-free to employees?
When meals are provided for the employer’s convenience and on the employer’s premises. ## Footnote Examples include meals for safety workers or when eating facilities are not available near the workplace.
40
What is the tax treatment of **employer-provided lodging**?
Lodging is generally 100% deductible by the employer and not taxable to the employee if required as a condition of employment. ## Footnote The exclusion does not apply if the employee can choose additional pay or a cash allowance instead of free lodging.
41
What are the two types of **tax-free educational assistance**?
* Job-related education (IRC section 132) * Non-job-related education (IRC section 127) ## Footnote Job-related education maintains or improves skills needed in the employee’s current job, while non-job-related education does not need to be related to the job.
42
What is the **annual limit** for non-job-related educational assistance?
$5,250 ## Footnote If an employer pays more than this amount, the excess is taxed as wages to the employee.
43
What is a **tuition reduction benefit**?
An education-related fringe benefit in which an educational institution reduces or waives tuition for an employee, their spouse, or dependents. The value is tax-free if: * It is provided by a qualified educational organization, * It is for undergraduate-level courses ## Footnote Graduate education qualifies if the student performs teaching or research activities for the educational organization.
44
What is the tax treatment of **employee discounts**?
Discounts are tax-free if they do not exceed 20% of the price charged to regular customers. ## Footnote The discount must be offered to all employees and does not apply to real or investment property.
45
How are nonstatutory stock options **taxed** if the fair market value is not readily determined?
There is no taxable event when the option is granted. Taxable income arises when the option is exercised. ## Footnote The income is the difference between the fair market value of the stock at exercise and the option price, reported on Form W-2.
46
What are the two types of **statutory stock options**?
* Incentive stock options (ISOs) - Granted to employees; if holding period rules are met, no income is recognized at exercise and gain may be long-term capital gain when sold. * Employee stock purchase plan (ESPP) options - Granted under a qualified plan; allow employees to buy stock, often at a discount, with favorable tax treatment if requirements are met.
47
When does an employee have taxable income from **exercising an Incentive Stock Option** (ISO)?
Only when they eventually sell the stock purchased by exercising the option. ## Footnote The income or loss is the difference between the amount paid for the stock (option price) and the amount received when it is sold, treated as capital gain or loss.
48
What is the tax treatment of employer-reimbursed moving expenses under the **Tax Cuts and Jobs Act**?
For most taxpayers, employer-reimbursed moving expenses are taxable, included in wages, and subject to income and employment taxes. The only exception is for certain active-duty members of the Armed Forces who move due to a military order. ## Footnote Employers can deduct these reimbursements as wages, even if they are substantiated and reimbursed under an accountable plan.
49
What is a **no-additional-cost service**?
A service provided to an employee that does not significantly increase costs for the business, often related to excess capacity services. ## Footnote Examples include airline tickets for employees of an airline, and the exclusion also extends to to immediate family members.
50
# True or False: Employers can deduct the cost of employee transportation benefits.
False ## Footnote Under the Tax Cuts and Jobs Act, the business deduction for employee transportation benefits is eliminated.
51
What are **qualified transportation benefits**?
* Transit passes * Qualified parking * Rides in a commuter highway vehicle ## Footnote Bicycle commuting reimbursements are not included as qualified transportation benefits.
52
Under what condition is the personal use of an employer-provided vehicle **not taxable**?
When used by public safety professionals who are required to use the vehicle for commuting. ## Footnote The vehicle must be clearly marked and used primarily for public safety duties.
53
What is the **Affordable Care Act penalty** for failing to offer minimum essential coverage in 2024?
$247.50 per month per employee ($2,970 annualized), after excluding the first 30 full-time employees.
54
What defines an **Applicable Large Employer** (ALE) under the ACA?
An employer with **50 full-time employees** or a **combination** of full-time and part-time employees that is the hourly **equivalent of 50 full-time** employees. ## Footnote ALEs are subject to the employer-shared responsibility provisions.
55
What is the **Affordable Care Act penalty** for failing to offer affordable coverage that provides minimum value?
$372 per month ($4,460 if for an entire year) per full-time employee who receives the **Premium Tax Credit**.
56
What coverage must an employer offer to meet the Affordable Care Acts's **minimum value standard**?
* At least 60% of overall medical costs * Significant coverage for physician and inpatient hospital services ## Footnote Employers are not required to offer dental or vision coverage.
57
Under what conditions does a **cafeteria plan** fail discrimination testing?
If more than 25% of all benefits are given to **highly compensated employees** and key employees. ## Footnote If a plan fails discrimination testing, the favorable tax treatment for benefits is lost for these employees.
58
What are the eligibility criteria for contributing to a **Health Savings Account**? | (HSA)
* Covered by a high-deductible health plan (HDHP) * No other disqualifying health coverage * Not enrolled in Medicare * Not claimable as a dependent on another taxpayer's return ## Footnote Contributions to an HSA may be made by the individual, the employer, or another person on the individual’s behalf, but contributions must be made in cash.
59
# Fill in the blank: An HSA is a tax-favored savings account used to pay _\_\_\_\_ \_\_\_\_\_ \_\_\_\_\_.
qualified medical expenses
60
What happens if HSA funds are used for **non-medical expenses** before age 65?
They are subject to **income tax** and a 20% penalty.
61
What is the **excise tax** imposed on an employer if HSA contributions are not comparable for all employees?
35% of the amount the employer contributed to all employees' HSAs ## Footnote The plan cannot discriminate in favor of highly compensated employees, but employers can make larger contributions for non-highly compensated employees.
62
# True or False: **Telehealth coverage** prevents HSA eligibility for plan years beginning after 2024.
False ## Footnote A health plan will not fail to qualify as an HDHP merely because it provides telehealth and other remote care before the deductible is met.
63
What are the types of **flexible spending arrangements** most commonly used?
* Dependent Care FSAs (DCFSA) * Health Care FSAs (HCFSA)
64
What are **Qualified Small Employer Health Reimbursement Arrangements** ? | (QSEHRA)
Arrangements that allow **small employers** to reimburse **individual health coverage premiums** up to a certain limit, available to employers with fewer than 50 full-time employees who do not offer a group health plan.
65
What is an **accountable plan**?
A reimbursement arrangement where amounts paid are **deductible by the employer** and not taxable to the employee, requiring substantiation of expenses and return of excess reimbursements.
66
What is a **nonaccountable plan**?
A reimbursement arrangement where amounts paid are **taxable to employees** as wages and subject to employment taxes and withholding, with no substantiation requirements.
67
What are the deduction limits for **employee achievement awards**?
* $400 for awards that are not qualified plan awards. * $1,600 for all awards if an employee receives both qualified and non-qualified awards during the year.
68
# True or False: **Gift certificates** can be excluded from an employee's gross income.
False ## Footnote Gift certificates are considered 'cash equivalents' and cannot be excluded from an employee's gross income.
69
What are the three kinds of **stock options**?
* Incentive stock options * Employee stock purchase plan (ESPP) options * Nonstatutory (non-qualified) stock options, or NSOs
70
What form is issued when an **Incentive Stock Option** (ISO) is exercised?
**Form 3921**, Exercise of an Incentive Stock Option Under Section 422(b)
71
What is the **2025 monthly exclusion limit** for employee transportation benefits?
* $325 for combined commuter highway vehicle transportation and transit passes * $325 for parking benefits in addition to the $325 transit pass.
72
What penalties apply to **large employers** under the ACA?
* Section 4980H(a) penalty: Failure to offer minimum essential coverage * Section 4980H(b) penalty: Failure to offer coverage that is affordable and provides minimum value
73
# Fill in the blank: Under ACA, a "full-time employee" is an individual employed on average at least _\_\_\_\_ hours per week.
30
74
What is the purpose of **Form 3922**?
To report the **transfer of stock** acquired through an **Employee Stock Purchase Plan** under Section 423(c).
75
What is the maximum **enrollment waiting period** employers can impose for health plans under the ACA?
90 days
76
Does the ACA penalize employers if employees decline the offered **health coverage**?
No, as long as the **health insurance** is actually offered to the employees.
77
What is the minimum number of **full-time employees** an employer must have to be subject to ACA employer responsibility provisions?
50
78
What benefits might **small employers** with fewer than 50 full-time employees be eligible for under the ACA?
**Small Business Health Care Tax Credit** to help cover the cost of providing coverage.
EA - Part 2: Businesses
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