How the IRS is watching municipal employee benefits
By Randy Shepard
Local governments of all sizes continue to be the subject of Internal Revenue Service (IRS) audits that have resulted in assessment of significant fines and back taxes. Often these findings come as a surprise to the governments, who assume they were handling things properly.
The specific areas of IRS concern have been in four major areas: personal use of employer-provided vehicles, cell phones, clothing allowances and meal reimbursements.
PersonaI use of vehicles
The biggest risk is in the reporting and calculation of the “commuting benefit” for employees who are provided a take-home vehicle.
For employees with take-home vehicles, the commuting benefit is taxable income and must be reported to the IRS. The easiest way to do this is by establishing a daily benefit amount (IRS currently allows for $3.00 per day) and reporting it as taxable income on the employee’s Form W-2.
For elected officials with a government owned vehicle, the IRS requires a calculation using the lease value of the vehicle and a statement of the percentage of total vehicle usage that is personal in nature. This must also be reported as taxable income on the employee’s W-2.
Cell phones historically were considered listed property under the Internal Revenue Code Section 280F. The Small Business Jobs Act of 2010 enables the value of personal usage of a device provided to an employee predominately for business purposes to be excluded from the employee’s gross income. It is recommended that government entities adopt policies regarding the personal use of employer-provided cell phones, identifying the device as predominately for business purposes.
Many employers have a flat monthly payment to employees who use their personal cell phones for work-related purposes. Such flat monthly payments are no longer considered income. These payments can be made through the payroll system as reimbursements and excluded from taxable income.
In accordance with many collective bargaining agreements and other agreements, many public sector employees receive payments for clothing and uniforms. Where employees provide a proof of purchase and receive payment, no IRS tax liability exists.
However, in a system where employees receive a flat dollar allowance and do not have to account to the employer for this allowance (receipts), then the payment is a taxable fringe benefit. It is recommended that such allowances be paid through the payroll system with the appropriate payroll tax withholdings taken and included on the employee’s W-2. It is the employee’s responsibility to then deduct their actual expenditures and employee businesses expenses on their individual tax return subject to the normal limitations.
In general, reimbursements for employee meal and lodging expenses must be related to overnight travel on behalf of the employer.
There are many government entities with policies or agreements that reimburse employees for meals purchased a certain distance from their office or outside of the government’s boundaries. In both cases, these reimbursements are generally considered to be additional wages to the employee if there is no overnight travel associated with the expense, and must be reported as income on the employee’s W-2.
There are other significant areas of concern in this employee-benefit arena, including worker classification and independent contractor status, along with various awards and prizes. All of these issues merit a closer look by government leaders.
The IRS will likely not lighten up on its active enforcement of government-related employee benefit rules. Review your current situation and contact knowledgeable professionals with questions.
Randy Shepard, CPA, is a partner in The Bonadio Group’s Government Division and provides consulting, accounting and auditing services for clients such as municipalities, public authorities, school districts and local development corporations.