Publication 15-B Employer'S Tax Guide To Fringe Benefits

You can choose to ignore test (2) if the employee was not

Exclusion from wages. You can generally exclude the

also in the top 20% of employees when ranked by pay for

value of an employee discount that you provide to an

the preceding year.

employee from the employee’s wages, up to the following

limits.

Employee. For this exclusion, treat the following individu-

•

als as employees.

For a discount on services, 20% of the price that you

charge to nonemployee customers for the service.

•

A current employee.

•

For a discount on merchandise or other property,

A former employee who retired, left on disability, or

your gross profit percentage times the price that you

was laid off.

charge to nonemployee customers for the property.

•

A leased employee who has provided services to

you on a substantially full-time basis for at least a

Determine your gross profit percentage based on all

year if the services are performed under your pri-

property that you offer to customers (including employee

mary direction or control.

customers) and your experience during the tax year imme-

•

diately before the tax year in which the discount is avail-

Yourself (if you are a sole proprietor).

able. To figure your gross profit percentage, subtract the

•

A partner who performs services for a partnership.

total cost of the property from the total sales price of the

property and divide the result by the total sales price of the

property.

Exclusion from wages. You can exclude up to $5,250 of

educational assistance you provide to an employee under

Exception for highly compensated employees. You

an educational assistance program from the employee’s

cannot exclude from the wages of a highly compensated

wages each year.

employee any part of the value of a discount that is not

available on the same terms to one of the following groups.

Assistance over $5,250. If you do not have an educa-

•

tional assistance plan, or you provide an employee with

All of your employees, or

assistance exceeding $5,250, you can exclude the value

•

A group of employees defined under a reasonable

of these benefits from wages if they are working condition

classification you set up that does not favor highly

benefits. Property or a service provided is a working condi-

compensated employees.

tion benefit to the extent that if the employee paid for it, the

amount paid would have been deductible as a business or

For this exclusion, a highly compensated employee for

depreciation expense. See Working Condition Benefits,

2003 is an employee who meets either of the following

on page 16.

tests.

Form 5500. If you maintain an educational assistance

program, ERISA may require you to file Form 5500. See

1) The employee was a 5% owner at any time during

the Instructions for Form 5500.

the year or the preceding year.

2) The employee received more than $90,000 in pay for

the preceding year.

Employee Discounts

You can choose to ignore test (2) if the employee was not

also in the top 20% of employees when ranked by pay for

the preceding year.

This exclusion applies to a price reduction that 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 Stock Options

employee performs substantial services. However, it does

not apply to discounts on real property or discounts on

There are three classes of stock options — incentive stock

personal property of a kind commonly held for investment

options, employee stock purchase plan options, and non-

(such as stocks or bonds).

statutory (nonqualified) stock options.

Generally, for income tax purposes, incentive stock

Employee. For this exclusion, treat the following individu-

options and employee stock purchase plan options are

als as employees.

excluded from wages both when the options are granted

•

A current employee.

and when they are exercised (unless the stock is disposed

•

of in a disqualifying disposition). However, the spread

A former employee who retired or left on disability.

(between the exercise price and fair market value of the

•

A widow or widower of an individual who died while

stock at the time of exercise) is included in wages subject

an employee.

to social security, Medicare, and Federal unemployment

•

(FUTA) taxes when the options are exercised. Income tax

A widow or widower of an employee who retired or

withholding is not required at the time of exercise.

left on disability.

The spread on nonstatutory options normally is included

•

A leased employee who has provided services to

in wages for income tax purposes when the options are

you on a substantially full-time basis for at least a

exercised. (See Regulations section 1.83-7.) The spread

year if the services are performed under your pri-

on nonstatutory options is also subject to social security,

mary direction or control.

Medicare, and FUTA taxes, and income tax withholding at

•

A partner who performs services for a partnership.

the time of exercise.

Page 8

Publication 15-B Employer'S Tax Guide To Fringe Benefits - 2003 Page 8

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