More 2005 Year-End Reminders
Here are some important reminders for year-end 2005, which we reported to our 30,000 members in their free monthly technical update, The General Ledger (www.aipb.org/general_ledger.html):

• Paychecks mailed this December 31 must be included in 2006 wages, not 2005. Under the rule of constructive receipt, a paycheck is included in the year in which the employee has access to the cash. When paychecks are mailed this late, employees will not have access to the cash until 2006, so these paychecks must be included in 2006 wages.
  
  
• Cafeteria plans can now give employees a grace period of up to 45 days after the plan year ends to spend their account balances—if the plan is amended by the end of the current calendar year. [Notice 2005-42] Employees can use 1 year’s salary deferrals to pay qualified expenses in up to the first 2½ months of the following plan year. For calendar year taxpayers, the grace period can extend to March 15 of 2006. If your employer amends its cafeteria plans to offer employees a grace period, continue to report the salary reductions in Box 10 of the W-2, as provided in Notice 89-111.
  
  
• Cash bonuses or gifts, no matter how small, must be treated as wages subject to FITW, FICA, FUTA and state and local payroll taxes. If you decide to pay the bonus separately from regular wages, or with regular wages but identify it as separate, you can use the supplemental withholding rate of 25% for 2005. [26 CFR 31.3402(g)-1]
  
  
• Discretionary bonuses do not affect employee’s overtime pay rate. These are lump-sum payments that the employer decides to give, when to give and how much to give—and are neither required under a contract, agreement or promise nor part of a pattern that leads employees to expect them. In other words, to qualify as discretionary, the bonus must be a complete surprise to the employee. An exception is holiday bonuses that, even if given each year, leading employees to expect them, can still be treated as discretionary. A discretionary bonus for hourly employees does not affect their overtime pay rate. [29 CFR 778.211]
  
  
• Nondiscretionary bonuses must be included in the employee's overtime pay rate. These are bonuses given under a contract, agreement or promise, express or implied—e.g., a bonus for faster or higher production, improved quality or to get someone to stay with the company or take a job—or bonuses that employees have come to expect.
  
  
• Prizes and awards must be included in wages, subject to all taxes. Generally, prizes and awards for efficiency, production, attendance, quality or other work-related achievements are included in overtime pay calculations. If the bonus is merchandise, include the fair market value, not the actual cost, in the employee's pay rate when calculating the overtime pay rate.
  
  
• Noncash Prizes must be included in wages at their fair market value, (which may be higher than what your company paid for them) subject to FIT, FITW, FICA and FUTA. [Rev. Rul. 57-18, CB 1957-1, 35]
  
  
• Gifts that are nontaxable as de minimis fringe benefits include a turkey, ham, bottle of champagne, flowers, fruit basket, ticket to a sports event (season tickets, however, would be taxable), etc.
  
  
• Gifts that are taxable include a gift certificate for a turkey or ham, a case of champagne, season tickets to sports events, etc. Include these in wages subject to FIT, FITW, FICA and FUTA. Note that while a turkey is nontaxable, a gift certificate for a turkey is taxable as “cash in kind” and therefore subject to all taxes and withholding. [26 CFR 1.132-6(e); TAM 200437030]
  
  
• Christmas parties are generally nontaxable. The IRS considers the cost of occasional parties to be nontaxable to employees and their families as a de minimis fringe—if such parties are infrequent and for the purpose of promoting employee health, goodwill, contentment or efficiency. Examples include: holiday or occasional cocktail parties and company picnics. In addition, such parties are fully deductible to the business (i.e., not subject to the 50% limit on business meals). [IRC §132]
  
  
• Group term life (GTL) insurance of up to $50,000 is exempt from FIT, FITW, FICA and FUTA. If over $50,000, use IRS Premium Table I. Subtract employee aftertax contributions for coverage from the value of the GTL to determine the taxable amount, which is subject to FIT and FICA, but not FITW and FUTA, and is reported in Boxes 1, 3, 5, and Box 12 with Code C. For former employees’ taxable GTL, report Social Security tax not withheld in Box 12 with Code M and Medicare tax not withheld withheld in Box 12 with Code N. Do not report these amounts as withheld in Boxes 4 or 5. If a plan favors highly compensated employees, all GTL, including the first $50,000, is FIT and FICA taxable and included in Boxes 1, 3 and 5.