NORTH CAROLINA AGRICULTURAL AND TECHNICAL STATE UNIVERSITY DIVISION OF BUSINESS AND FINANCE OFFICE OF THE COMPTROLLER UNIVERSITY PAYROLL OFFICE Fringe Benefits Taxability, Payroll Reporting (Non-Salary Compensation, Awards, Prizes, Gifts) Additional References: Internal Revenue Code § 132. Related Policies: Awarding a Prize, Retirement Gift, Teaching Award Non-Salary and Deferred Compensation Policy, rev. January 9, 2008 I. POLICY STATEMENT Certain benefits provided to employees (such as non-salary compensation, awards, prizes, or gifts) may be subject to taxation. An employee benefit is any property, service, or cash compensation provided to an employee in direct or indirect connection with the performance of service for North Carolina Agricultural and Technical State University (“NC A&T” or “University”) and in lieu of or in addition to regular wages. Taxable employee benefits are governed by the Internal Revenue Code. Some benefits qualify for exclusion from the employee‟s taxable income. Some benefits can be either taxable or non-taxable income, depending upon the use of the benefit. Generally, any personal use of an employer-provided benefit is subject to taxation. This policy establishes the criteria used to determine the taxability of these benefits, including complimentary University event tickets, given to any University employee for personal use. The intent of this policy is to ensure that these benefits are properly accounted for and any required taxes are recorded and withheld. This policy is in accordance with Internal Revenue Service regulations relating to fringe benefits. II. TAXABILITY OF CASH AND NON-CASH GIFTS A. Cash Gifts Cash gifts, prizes and awards given to employees that are paid with University funds (including but not limited to state funds, grant funds, contract funds, and gift funds) constitute gross wages subject to federal and state income and FICA taxation. Cash and cash equivalent fringe benefits (e.g., use of gift card or certificate, charge card or credit card), no matter how little, are never excludable as fringe benefits, except for occasional meal money or transportation fare. B. Non-Cash Gifts Non-cash gifts, prizes and awards given to employees are subject to federal and state income and FICA taxation, unless these items of recognition qualify as one of the following: 1. ‘De minimis’ Fringe Benefits The University may reward an employee‟s noteworthy, work-related accomplishments by presenting items of tangible personal property without tax consequences provided the value of the items, in addition to other gifts, prizes or awards presented throughout the calendar year to the employee, do not exceed $40. The rationale is that these items of recognition constitute „de minimis‟ fringe benefits that are considered so small that accounting for them would be unreasonable or administratively impracticable. Examples of „de minimis‟ fringe benefits include, but are not limited to, the following: ▪ A holiday gift, other than cash, with a low fair market value; and, ▪ An occasional ticket for an entertainment or sporting event. 2. Achievement Awards This exclusion applies to the value of any tangible personal property you give to an employee as an award for either length of service or safety achievement. The exclusion does not apply to awards of cash, cash equivalents, or other tangible property such as vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, and other securities. The award must meet the requirements for employee achievement awards, discussed below. a. Length of Service Awards Length of Service awards may qualify as a non-taxable benefit, provided: ▪ the employee has at least five years of service to the University; ▪ the employee has not received a length of service award within the last five years; ▪ the awards are limited to $400 per employee per year; ▪ the awards are presented as part of a meaningful presentation; and ▪ the awards are made under conditions and circumstances that do not create a significant likelihood of disguised pay. Should an employee receive a length of service award that exceeds $400, the excess amount shall be reported to University Payroll and included as taxable wages on the employee‟s Form W-2. b. Safety Achievement Awards Safety Achievement awards that recognize an employee‟s accomplishments for maintaining or promoting defined safety standards may qualify for exclusion from taxation, provided: ▪ the awards are limited annually to less than 10% of total employees; ▪ the awards are not presented to managers, administrators, clerical and professional employees; ▪ the awards are limited to $400 per employee per year; ▪ the awards are presented as part of a meaningful presentation; ▪ the awards are made under conditions and circumstances that do not create a significant likelihood of disguised pay. Should an employee receive safety achievement awards that exceed $400 during the calendar year, the excess amount shall be reported to University Payroll and included as taxable wages on the employee‟s Form W-2. III. OCCASIONAL ENTERTAINMENT OR SPORTING EVENT TICKETS As stated above, the occasional issuance of an entertainment or sporting event ticket to an employee for personal use is not taxable, as long as the ticket is of „de minimis‟ value. IV. SEASON TICKETS Season tickets for events, including sporting or theater events, issued to an employee for personal use shall be reported to University Payroll and included as taxable wages on the employee‟s Form W-2. V. OTHER EXCLUSIONS In addition to „de minimis‟ fringe benefits, discussed above, Internal Revenue Code § 132 provides exclusions for three additional broad categories of commonly provided fringe benefits: Working condition fringe benefits: Property or services provided to employees to be used in the conduct of their job. Adequate records must be maintained to substantiate the business use of the property or services. Business use of University provided vehicles, telephones, or safety clothing are examples of a working condition fringe benefit. Employee discounts: This exclusion applies to a price reduction you give an employee on property or services you offer to customers in the ordinary course of the line of business in which the employee performs services. However, it does not apply to discounts on real property or discounts on personal property of a kind commonly held for investment (such as stocks or bonds). The maximum qualified employee discount is 20% of the price at which the services or products are offered to the general public. No-additional-cost services: The University must incur no substantial additional expense in making the service available to all employees. For example, NC A&T can offer non- instructional services to students, employees (tax-free) and the general public such as musicals, art shows, or other cultural events. VI. VALUATION The general rule for valuation is fair market value, which would be the amount that the employee would have to pay a third party in an arm‟s length transaction to buy or lease the particular benefit. Special rules exist for automobiles; the University generally uses the IRS Lease Valuation model. For required safety clothing, the NC Office of State Budget specifies a maximum $75 annual allowance. Employees receiving University provided cellular telephones or similar mobile communications devices (but not an MCD allowance) must document the business purpose of each call and reimburse the University for any personal calls made, per current IRS regulations. VII. PROCESSING AND REPORTING GUIDELINES Contact the University‟s Division of Business and Finance (Comptroller‟s Office/Payroll) for processing and reporting guidelines.