5. Wages and Other Compensation Wages subject to Federal employment taxes include all pay you givean employee for services performed. The pay may be in cash or in otherforms. It includes salaries, vacation allowances, bonuses,commissions, and fringe benefits. It does not matter how you measureor make the payments. Also, compensation paid to a former employee forservices performed while still employed is wages subject to employmenttaxes. See section 6 for a discussion of tips and section 7 for adiscussion of supplemental wages. Also see section 15 for exceptionsto the general rules for wages. Pub. 15-A, Employer'sSupplemental Tax Guide, provides additional information on wages andother compensation, including: Awards Educational assistance Outplacement services Dependent care assistance Adoption assistance Withholding for idle time Back pay Supplemental unemployment benefits Below-market loans Group-term life insurance Leave sharing Cafeteria plans Deferred compensation Employee stock options Employee stock options Retirement plans Employee business expense reimbursements.A reimbursement or allowance arrangement is a system by which yousubstantiate and pay the advances, reimbursements, and charges foryour employees' business expenses. How you report a reimbursement orallowance amount depends on whether it is an accountable or anonaccountable plan. If a single payment includes both wages and anexpense reimbursement, you must specify the amount of thereimbursement. These rules apply to all ordinary and necessary employee businessexpenses that would otherwise qualify for a deduction by the employee. Accountable plan.To be an accountable plan, your reimbursement or allowancearrangement must require your employees to meet all three of thefollowing rules. They must have paid or incurred deductible expenses whileperforming services as your employees. They must adequately account to you for these expenseswithin a reasonable period of time. They must return any amounts in excess of expenses within areasonable period of time. Amounts paid under an accountable plan are not wages and are notsubject to income tax withholding and payment of social security,Medicare, and Federal unemployment (FUTA) taxes. If the expenses covered by this arrangement are not substantiatedor amounts in excess of expenses are not returned within a reasonableperiod of time, the amount is treated as paid under a nonaccountableplan. This amount is subject to income tax withholding and payment ofsocial security, Medicare, and FUTA taxes for the first payroll periodfollowing the end of the reasonable period. A reasonable period of time depends on the facts and circumstances.Generally, it is considered reasonable if your employees receive theadvance within 30 days of the time they incur the expense, adequatelyaccount for the expenses within 60 days after the expenses were paidor incurred, and they return any amounts in excess of expenses within120 days after the expense was paid or incurred. Also, it isconsidered reasonable if you give your employees a periodic statement(at least quarterly) that asks them to either return or adequatelyaccount for outstanding amounts and they do so within 120 days. Nonaccountable plan.Payments to your employee for travel and other necessary expensesof your business under a nonaccountable plan are wages and subject toincome tax withholding and payment of social security, Medicare, andFUTA taxes. Your payments are treated as paid under a nonaccountableplan if: Your employee is not required to or does not substantiatetimely those expenses to you with receipts or other documentationor You advance an amount to your employee for business expensesand your employee is not required to or does not return timely anyamount he or she does not use for business expenses. Per diem or other fixed allowance.You may reimburse your employees by travel days, or miles, or someother fixed allowance. In these cases, your employee is considered tohave accounted to you if the payments do not exceed rates establishedby the Federal Government. The 1999 standard mileage rate for autoexpenses was 32.5 cents per mile through March 31, 1999, and 31 centsper mile beginning April 1. The rate for all of 2000 is 32.5 cents permile.See Pub. 553,Highlights of 1999 Tax Changes, for the 2000 standard mileagerate. The government per diem rates for meals and lodging in thecontinental United States are listed in Pub. 1542, Per DiemRates. Other than the amount of these expenses, your employees'business expenses must be substantiated (for example, the businesspurpose of the travel or the number of business miles driven). If the per diem or allowance paid exceeds the amounts specified,you must report the excess amount as wages. This excess amount issubject to income tax withholding and payment of social security,Medicare, and FUTA taxes. Show the amount equal to the specifiedamount in box 13 of Form W-2, using code L. For more information, see chapter 16 in Pub. 535,Business Expenses. Wages not paid in money.If in the course of your trade or business you pay your employeesin a medium that is neither cash nor a readily negotiable instrument,such as a check, you are said to pay them "in kind." Payments inkind may be in the form of goods, lodging, food, clothing, orservices. Generally, the fair market value of such payments at thetime they are provided is subject to income tax withholding and socialsecurity, Medicare, and FUTA taxes. However, noncash payments for household work, agricultural labor,and service not in the employer's trade or business are exempt fromsocial security, Medicare, and FUTA taxes. Withhold income tax onthese payments only if you and the employee agree to do so. However,noncash payments for agricultural labor, such as commodity wages, aretreated as cash payments subject to employment taxes if the substanceof the transaction is a cash payment. Moving expenses.Reimbursed and employer-paid qualified moving expenses (those thatwould otherwise be deductible by the employee) are not includible inan employee's income unless you have knowledge that the employeededucted the expenses in a prior year. Reimbursed and employer-paidnonqualified moving expenses are includible in income and are subjectto employment taxes and income tax withholding. For more informationon moving expenses, get Pub. 521, Moving Expenses. Meals and lodging.The value of meals is not taxable income and is not subject toincome tax withholding and social security, Medicare, and FUTA taxesif the meals are furnished for the employer's convenience and on theemployer's premises. The value of lodging is not subject to income taxwithholding and social security, Medicare, and FUTA taxes if thelodging is furnished for the employer's convenience, on the employer'spremises, and as a condition of employment. "For the convenience of the employer" means that you have asubstantial business reason for providing the meals and lodging otherthan to provide additional compensation to the employee. For example,meals you provide at the place of work so an employee is available foremergencies during his or her lunch period are generally considered tobe for your convenience. However, whether meals or lodging are provided for the convenienceof the employer depends on all the facts and circumstances. A writtenstatement that the meals or lodging are for your convenience is notsufficient. 50% test. If over 50% of the employees who are provided meals on anemployer's business premises receive these meals for the convenienceof the employer, all meals provided on the premises are treated asfurnished for the convenience of the employer. If this 50% test ismet, the value of the meals is excludable for all employees and is notsubject to income tax withholding or employment taxes. For more information, see chapter 2 in Pub. 535. Health insurance plans.If you pay the cost of an accident or health insurance plan foryour employees, which may include an employee's spouse and dependents,your payments are not wages and are not subject to social security,Medicare, and FUTA taxes, or income tax withholding. Generally, thisexclusion applies to qualified long-term care insurance contracts.However, the cost of health insurance benefits must be included in thewages of S corporation employees who own more than 2% of the Scorporation (2% shareholders). Medical savings accounts.Your contributions to an employee's medical savings account (MSA)are not subject to social security, Medicare, or FUTA taxes, or incometax withholding if it is reasonable to believe at the time of paymentof the contributions that they will be excludable from the income ofthe employee. To the extent that it is not reasonable tobelieve they will be excludable, your contributions are subject tothese taxes. Employee contributions to their MSA through a payrolldeduction plan must be included in wages and are subject to socialsecurity, Medicare, and FUTA taxes, and income tax withholding. Medical care reimbursements.Medical care reimbursements paid for an employee under anemployer's self-insured medical reimbursement plan are not wages andare not subject to social security, Medicare, and FUTA taxes, orincome tax withholding. Fringe benefits.You generally must include fringe benefits in an employee's grossincome (but see Nontaxable fringe benefits below). Thebenefits are subject to income tax withholding and employment taxes.Fringe benefits include cars you provide, flights on aircraft youprovide, free or discounted commercial flights, vacations, discountson property or services, memberships in country clubs or other socialclubs, and tickets to entertainment or sporting events. In general,the amount you must include is the amount by which the fair marketvalue of the benefits is more than the sum of what the employee paidfor it plus any amount the law excludes. There are other special rulesyou and your employees may use to value certain fringe benefits. SeePub. 535 for more information. Nontaxable fringe benefits.Some fringe benefits are not taxable if certain conditions are met.See chapter 4 of Pub. 535 for details. Examples are: Services provided to your employees at no additional cost toyou. Qualified employee discounts. Working condition fringes that are property or services theemployee could deduct as a business expense if he or she had paid forit. Examples include a company car for business use and subscriptionsto business magazines. Minimal value fringes (including an occasional cab ride whenan employee must work overtime, local transportation benefits providedbecause of unsafe conditions and unusual circumstances, and meals youprovide at eating places you run for your employees if the meals arenot furnished at below cost). Qualified transportation fringes subject to specifiedconditions and dollar limitations (including transportation in acommuter highway vehicle, any transit pass, and qualifiedparking). Qualified moving expense reimbursement. See page 9 fordetails. The use of on-premises athletic facilities if substantiallyall the use is by employees, their spouses, and their dependentchildren. Qualified tuition reduction, which an educationalorganization provides its employees for education. For moreinformation, see Pub. 520, Scholarships andFellowships. However, do not exclude the following fringe benefits from theincome of highly compensated employees unless the benefit is availableto employees on a nondiscriminatory basis. No-additional-cost services (item 1 above). Qualified employee discounts (item 2 above). Meals provided at an employer operated eating facility(included in item 4 above). Reduced tuition for education (item 8 above). For more information, including the definition of a highlycompensated employee, see Pub. 535. When fringe benefits are treated as paid.You may choose to treat certain noncash fringe benefits as paid bythe pay period, or by the quarter, or on any other basis you choose aslong as you treat the benefits as paid at least as often as once ayear. You do not have to make a formal choice of payment dates ornotify the IRS of the dates you choose. You do not have to make thischoice for all employees. You may change methods as often as you like,as long as you treat all benefits provided in a calendar year as paidby December 31 of the calendar year. See Pub.15-A for moreinformation, including a discussion of the special accounting rule forfringe benefits provided during November and December. Valuation of fringe benefits.Generally, you must determine the value of fringe benefits no laterthan January 31 of the next year. Prior to January 31, you mayreasonably estimate the value of the fringe benefits for purposes ofwithholding and depositing on time. Withholding on fringe benefits.You may add the value of fringe benefits to regular wages for apayroll period and figure withholding taxes on the total, or you maywithhold Federal income tax on the value of the fringe benefits at theflat 28% supplemental wage rate. You may choose not to withhold income tax on the value of anemployee's personal use of a vehicle you provide. You must, however,withhold social security and Medicare taxes on the use of the vehicle.Get Pub. 15-A for more information on this election. Depositing taxes on fringe benefits.Once you choose payment dates for fringe benefits (discussedabove), you must deposit taxes in the same deposit period you treatthe fringe benefits as paid. To avoid a penalty, deposit the taxesfollowing the general deposit rules for that deposit period. If you determine by January 31 that you overestimated the value ofa fringe benefit at the time you withheld and deposited for it, youmay claim a refund for the overpayment or have it applied to your nextemployment tax return (see Valuation of fringe benefitsabove). If you underestimated the value and deposited toolittle, you may be subject to the failure to deposit penalty. Seesection 11 for information on deposit penalties. If you deposited the required amount of taxes but withheld a lesseramount from the employee, you can recover from the employee the socialsecurity, Medicare, or income taxes you deposited on his or herbehalf, and included in the employee's Form W-2. However, you mustrecover the income taxes before April 1 of the following year. Sick pay.In general, sick pay is any amount you pay, under a plan you takepart in, to an employee who is unable to work because of sickness orinjury. These amounts are sometimes paid by a third party, such as aninsurance company or employees' trust. In either case, these paymentsare subject to social security, Medicare, and FUTA taxes. Sick paybecomes exempt from these taxes after the end of 6 calendar monthsafter the calendar month the employee last worked for the employer.The payments are also subject to income tax. See Pub. 15-A for moreinformation.