(a) Compensation
includes items of remuneration received, directly or through an agent, in cash
or in property, based on payroll periods or piecework, for services rendered as
an employee or casual employee, agent or officer of an individual, partnership,
business or nonprofit corporation, or government agency. These items include
salaries, wages, commissions, bonuses, stock options, incentive payments, fees,
tips, dismissal, termination or severance payments, early retirement incentive
payments and other additional compensation contingent upon retirement,
including payments in excess of the scheduled or customary salaries provided
for those who are not terminating service, rewards, vacation and holiday pay,
paid leaves of absence, payments for unused vacation or sick leave, tax assumed
by the employer, or casual employer signing bonuses, amounts received under
employee benefit plans and deferred compensation arrangements, and other
remuneration received for services rendered.
(b) Scholarships, stipends, grants and
fellowships shall be taxable as compensation, if services are rendered in
connection therewith.
(1) When used in this
subsection, the following words have the following meanings, unless the context
clearly indicates otherwise:
(i)
Fellowship stipend or fellowship award-A
fixed sum of money paid periodically for services or to defray expenses to a
graduate student who is enrolled in a graduate degree program at a
university.
(ii)
Grant-in-aid-Financial support given by a public agency or
private institution to an individual to further the individual's
education.
(iii)
Postdoctoral research fellowship stipend or
postdoctoral research fellowship award-A fixed sum of money
paid periodically for services or to defray expenses of an individual who has
obtained a doctoral degree at a university and is conducting research at a
research facility.
(iv)
Scholarship-A grant-in-aid to a student.
(2) Scholarships, grants, awards and other
types of student aid which require no past, present or future services in
return for receipt of the funds are not taxable.
Examples:
(i) John has a high school diploma and is
currently employed. John's employer promises to pay for John's college tuition,
room and board for 4 years if John agrees to return to his employer after
obtaining his degree and to work for the employer for 4 consecutive years.
John's grant-in-aid is taxable compensation and is subject to Pennsylvania
employer withholding and reporting.
(ii) Peter is employed by ABC Company. Peter
and ABC Company agree that he will work for them for 1 year without receiving
any salary. In return, after that year Peter will attend XYZ College and ABC
Company will pay his tuition, room and board for the entire year. ABC's payment
of Peter's tuition, room and board is taxable compensation and is subject to
Pennsylvania employer withholding and reporting.
(iii) John is employed by XYZ Corporation.
XYZ Corporation has established a "Scholarship Program" for the children of its
employes. The program does not qualify as an employer scholarship program for
Federal income tax purposes. John's child, Erin, receives a "scholarship" from
the plan to attend college. The fair market value of the Federally nonqualified
scholarship is taxable compensation to John and is subject to Pennsylvania
employer withholding.
(3)
Fellowship awards or fellowship stipends made to graduate students enrolled in
a graduate degree program at a university chartered by a state or foreign
country on the basis of need or academic achievement for the purpose of
encouraging or allowing the recipient to further his educational development
are not taxable. When the fellowship awards or fellowship stipends are made as
compensation for past or present employment or in expectation of future
employment services they are taxable.
Example:
Jane is enrolled in a graduate degree program in
biochemistry at a university. Jane is in the first year of a 3-year graduate
degree program. A pharmaceutical company enters into an agreement to pay the
remaining tuition, room and board expenses necessary for Jane to obtain her
graduate degree. In return, Jane promises to work for the pharmaceutical
company for 4 years after graduation. Jane's receipt of these payments from her
future employer constitute taxable compensation.
(4) Fellowship awards and fellowship stipends
are taxable compensation for services if the recipient is required to apply his
skill and training to advance research, creative work or some other project or
activity, unless the recipient can show that the recipient is a candidate for a
degree and the same activities are required of all candidates for that degree
as a condition to receive that degree.
Example:
Steven is enrolled in a graduate degree program in
education at ABC University. Degree candidates are required to teach an
undergraduate education course for 5 hours a week to obtain their degree.
Steven and two of the other 15 candidates in the degree program are receiving
fellowship stipends. If Steven does not perform additional services for ABC
University, his teaching will not make his stipend taxable compensation.
(5) For a payment received by a
postdoctoral research fellow for conducting research to be excludable from the
definition of compensation, the payment shall meet the following conditions. If
the payment fails to meet one or more of these conditions, the payment is
taxable compensation:
(i) The source of
funding for the payment is a governmental agency, a private foundation as
described in section 509 of the Internal Revenue Code (26 U.S.C.A. §
509), a Federally exempt organization as
described in sections 501(c)(3) or (5) of the Internal Revenue Code
(26 U.S.C.A. §
501(c)(3) and (5)), or a
public or private university chartered by a state.
(ii) The organization which is permitting the
fellow to use its facilities and which is sponsoring the fellow's research
(sponsoring organization) is a governmental agency, a Federally exempt
organization as described in section 501(c)(3) of the Internal Revenue Code, or
a public or private university chartered by a state.
(iii) Prior to enrollment in the sponsoring
organization's postdoctoral research fellowship program, the fellow has
obtained a doctoral degree in a field of study which is related to the field of
study being researched by the fellow.
(iv) The amount of the fellow's stipend or
grant is based on the scale established by the source of funding.
(v) Each fellow formulates his own research
project or advances his own research project throughout the stipend or grant
period.
(vi) The sponsoring agency
serves only in an advisory capacity in the selection of research projects and
cannot establish or control the fellow's hours or methods of research except as
control relates to legal or regulatory matters.
(vii) The fellow is not required to perform
administrative work, teaching assignments or other duties for the sponsoring
organization or another entity as a condition for receiving a payment and will
not be penalized for not performing these duties.
(viii) The fellow is not required to enter a
contractual commitment for future employment with a specified entity as a
condition for obtaining or continuing to obtain the payments.
(ix) Payments to the fellow for conducting
research are limited to no more than 36 months.
(x) Research results or writings made by the
fellow during the program do not become the property of the sponsoring
organization or another entity other than the fellow. Patent or copyright
royalties or other income derived directly or indirectly from the fellow's
research results or writings may become the property of the sponsoring
organization. Income or gain derived from patent or copyright royalties by the
postdoctoral research fellow is taxable income to the fellow.
(xi) The fellow is not required to assist
employes of the sponsoring organization in conducting research being performed
by employes of the sponsoring organization.
Example:
John is a postdoctoral research fellow at ABC Cancer
Research Institute. His research is being funded by the National Institute of
Health. The sponsoring organization, ABC Cancer Research Institute, requires
John to spend half of his time assisting its own employes on their own research
project as a condition for sponsoring his research. John's postdoctoral
research fellowship stipend is taxable compensation.
(xii) The fellow does not receive fringe
benefits to which an employe of the sponsoring organization is entitled, except
to the extent that the benefits are at no additional cost to the sponsoring
organization. For purposes of this subparagraph "fringe benefits" means payor
provided health, life, disability income or group legal services insurance
plans, payor provided automobile and payor provided dependent care assistance,
educational assistance plans or retirement benefits.
(xiii) Pennsylvania unemployment compensation
premiums are not required to be paid by the sponsoring organization or another
entity on behalf of the fellow.
(xiv) Federal social security employment tax
is not required to be paid by the sponsoring organization or another entity or
the fellow with respect to the fellowship.
(xv) The fellow is not under the coverage of
the sponsoring organization's worker's compensation insurance plan or
policy.
(6) Fellowship
stipends paid to medical interns and residents under an internship or residency
program which conforms or substantially conforms to standards set by the
American Medical Association are taxable compensation.
(c) Compensation does not mean or include any
of the following:
(1) Periodic payments for
periods of sickness or disability paid by or on behalf of an employer under a
program or plan unless the payments are regular wages. Additionally, no amount
of damages received (whether by suit or agreement and whether as lump sums or
as periodic payments) if pain and suffering, emotional distress or other like
noneconomic element was, or would have been, a significant evidentiary factor
in determining the amount of the taxpayer's damage. No payments made by
third-party insurers for periods of sickness or disability would be considered
payments of regular wages. A program or plan where any of the following occur
would not be considered payment of regular wages:
(i) The periodic payments have no direct
relationship to the employe's usual rate of compensation.
(ii) The periodic payments are computed with
reference to the nature of the sickness or disability and without regard to the
employe's job classification.
(iii)
Periodic payments would be reduced by payments arising under Workmen's
Compensation Acts, Occupational Disease Acts, Social Security Disability or
similar legislation by any government.
(iv) The periodic payments exceed the
employe's usual compensation for the period.
(2) Disability, retirement or other payments
arising under workmen's compensation acts, occupational disease acts or similar
legislation by any government.
(3)
Federal old age insurance benefits payable under
42 U.S.C.A. §
401, Railroad Retirement Act benefits payable
under 45 U.S.C.A. §
228 or
231 or any retired or retainer pay
of a member or former member of a uniformed service computed under
10 U.S.C.A. §
1401.
(4) Payments commonly known as public
assistance or unemployment compensation by a government agency.
(5) Payments made by employers to employes to
reimburse actual expenses allowable as an ordinary, reasonable and necessary
business expense.
(6) Payments made
by an employer or labor union or elective contributions deemed to be made by an
employer under a cafeteria plan for a nondiscriminatory health, accident or
death plan.
Example:
P is a partnership that is engaged in providing
accounting services. On a nondiscriminatory basis, it offers the following
fringe benefits to both employes and partners of the firm:
Blue Cross/Blue Shield medical coverage.
Dental and eyeglass coverage with a deductible.
Group term life insurance with coverage up to the
equivalent of the employe's annual salary.
P pays the premiums on behalf of all employes and
partners for all medical, dental, eyeglass and insurance coverage directly to
the insurance carrier or benefit provider. P does not add the premium costs for
the benefits to any employe's gross wages and it accounts for the benefit costs
as nonsalary fringe benefit expenses. In other words, the value of the benefits
are not shown as an addition to any employe's wages on the paystubs furnished
to employes.
The plan is not a Federally qualifying cafeteria
plan.
Conclusion: For the employes of P the employer-provided
hospitalization (Blue Cross/Blue Shield), eyeglass, dental coverage and group
life insurance benefits are excludable from compensation and are therefore not
subject to withholding. The premiums paid on behalf of the partners, however,
are not deductible or excludable from the income of the partnership or the
partners.
(7) The value of
meals and lodging furnished for the convenience of an employer or casual
employer does not constitute compensation. Payments made to an Individual
Retirement Account, as provided by the Employee Retirement Income Security Act
of 1974 (ERISA), the act of September 2, 1974 (Pub. L. No. 93-406, 88 Stat.
829), are not excludable in computing income which is subject to tax under this
article.
(8) Old Age or Retirement
Benefit Plans.
(i)
Scope. For
the purpose of this section, the term plan includes Individual Retirement plans
(IRA), Simplified Employee Pension Plans (SEP), Keogh plans, Federally
qualified employe pension plans and similar old age or retirement benefit
plans.
(ii)
Contributions.
(A)
Contributions to a plan made by employers or labor unions on behalf of an
employe are excludable from the employe's income, except as otherwise provided
in this chapter.
(B) Contributions
to a plan made by an employe or other individual directly or indirectly,
whether through payroll deduction, a salary reduction agreement or otherwise,
are not excludable from his income. Contributions by, on behalf of or
attributable to a self-employed person are not excludable from either
compensation or net profits from a business, profession or other
activity.
(iii)
Distributions.
(A) Amounts
distributed to an individual from a plan shall be included in income to the
extent that contributions were not previously included in this income except
for either of the following:
(I) Distributions
made upon or after his retirement from service after reaching a specific age or
after a stated period of employment.
(II) Distributions transferred into another
plan, where the transferred amounts are not included in income for Federal
income tax purposes.
(B)
To determine the portion of a distribution to be included in income, an
individual shall use the cost recovery method.
Example 1:
John contributed $1,000 to his IRA. He pays tax on the
$1,000 contribution. Three years later the account has earned $750 in income.
The total balance of the account at that time is ($1,000 + $750 =) $1,750. John
receives a distribution of $750 from his IRA. Since the amount of the
distribution does not exceed $1,000, the distribution is not includable in
income.
Example 2:
Same facts as Example 1, except that John receives a
distribution of $1,500. Since the amount of the distribution exceeds $1,000,
the excess of the distribution, $500, is includable in his income, as
compensation.
(iv)
Income on plan assets. Income on assets held in a plan is not
includable in income.
(9)
Payments made by an employer or labor union for a nondiscriminatory
supplemental unemployment benefit or strike benefit plan.
(10) Federally excludable benefits provided
for the convenience of the employer.
(11) Fringe benefits described in §
101.6a (relating to fringe
benefits in the form of personal use of property or services).
(12) Program benefits payable on condition of
hospitalization, sickness, disability or death under a health, accident or
death plan.
(13) Guaranteed
payments to a partner for services rendered to the partnership.
(14) Benefits payable by an employer or labor
union under a supplemental unemployment benefit plan, whether payable on a
periodic basis or in the form of cash, services or property.
(d) The Department may require the
submission of a statement from an employer or casual employer with respect to
its employes or casual employes regarding the verification or substantiation of
unreimbursed and reimbursed business expenses. The statement of the employer or
casual employer should verify that the expenses were required by the employer
or casual employer. The statement shall set forth the types of expenses such as
travel, meals, hotel and so forth that the employer or casual employer
specifically requires the employe or casual employe to incur and to what
extent, if any, the expenses are reimbursed. If the employer or casual employer
requires the employe or casual employe to maintain an office, or
office-in-home, a statement by the employer or casual employer to this effect
should also be included. The Department does not require the employer or casual
employer to specifically list the amount expended or to verify each expense
incurred by the employe or casual employe.
(e) Compensation paid in a medium other than
cash shall be valued at its current market value. Compensation paid in the form
of employer-provided coverage under an employe welfare benefit plan shall be
valued at cost. The cost shall be the total amount of payment made during the
year by the employer on account of the plan and plan participant, except in the
following situations:
(1) In the case of
self-insured insurance plans, the cost shall be the annual cost for financial
accounting purposes.
(2) The amount
of compensation paid in the form of Federally taxable noncash fringe benefits
shall be determined in the same manner as is prescribed by the Internal Revenue
Service under Federal statutes and regulations.
(3) In the case of cafeteria plans, amounts
specified in the plan document as being available to the participant for the
purpose of selecting or purchasing benefits, when so used, shall be included in
the total amount of payment made during the year by the employer on account of
the plan and plan participant.
(f) Compensation in the form of incentive,
qualified, restricted or nonqualified stock options shall be considered to be
received:
(1) When the option is exercised if
the stock subject to the option is free from any restrictions having a
significant effect on its market value.
(2) When the restrictions lapse if the stock
subject to the option is subject to restrictions having a significant effect on
its market value.
(3) When
exchanged, sold or otherwise converted into cash or other property.
(g) The following rules apply if,
under a cafeteria plan, plan participants may choose between benefits
consisting of cash, additional paid vacation days, and other benefits; or if,
outside a cafeteria plan, plan participants can purchase additional paid
vacation days:
(1) If additional paid vacation
days are elected or purchased and they are used before the next calendar year,
the following apply:
(i) The amount of cash
foregone in exchange for the paid vacation day is excluded from
income.
(ii) The vacation pay is
includable in income when paid.
(2) If additional paid vacation days are
purchased outside a cafeteria plan and they are not used before the next
calendar year, the amount of cash foregone in exchange for the paid vacation
days is excludable for Pennsylvania Personal Income Tax purposes only if both
of the following apply:
(i) The value of the
vacation day cannot be cashed out or used for any other purpose.
(ii) The vacation day cannot be carried over
to the next taxable year.
(h) Employer payments to reimburse employes
for uninsured medical or dental expenses are taxable as compensation if the
employe is assured of receiving (in cash or any other benefit) amounts
available but unused for covered reimbursement during the year without regard
to whether the employe incurred covered expenses or not. If the amounts
available for covered reimbursement cannot be cashed out or used for any other
purpose during the taxable year or be carried over to any other taxable year,
normal cash compensation that is forgone by an employe under a spending account
or otherwise, and credited to a self-insured medical reimbursement account and
drawn upon to reimburse the employe for uninsured medical or dental expenses to
which section 105(b) of the IRC (26 U.S.C.A. §
105(b)) applies is
excludable from tax.
(i) After
December 31, 1996:
(1) Payments made after
December 31, 1996, for employe welfare benefit plans under a cafeteria plan
will be deemed to be an "employer contribution" for Pennsylvania Personal
Income Tax purposes if the following apply:
(i) The payments were not actually or
constructively received, after taking section 125 of the IRC (26 U.S.C.A. §
125) into account.
(ii) The payments were specified in a written
cafeteria plan document as being available to the participant:
(A) For the purpose of selecting or
purchasing benefits under a plan.
(B) As additional cash remuneration received
in lieu of coverage under a plan.
(iii) The benefits selected or purchased are
nontaxable under the IRC when offered under a cafeteria plan.
(iv) The payments made for the plan would be
nontaxable under the Pennsylvania Personal Income Tax if made by the employer
outside a cafeteria plan.
(2) If the requirements of paragraph (1) are
satisfied, cafeteria plan contributions are taxed under such rules as they
apply to employer payments for employe welfare benefit plans. However, if the
benefits are taxable for Federal Income Tax purposes when offered under a
cafeteria plan, the payments will also constitute compensation for Pennsylvania
Personal Income Tax purposes. Payments also will constitute compensation if
they would be taxable under the Pennsylvania Personal Income Tax if made by the
employer outside a cafeteria plan. For example, although not taxable under the
IRC, coverage under a dependent care plan providing for the reimbursement of
expenses for household or dependent care services would constitute compensation
under the Pennsylvania Personal Income Tax because it would be taxable if made
by an employer outside a cafeteria plan.
(j) Compensation includes the entire cost of
employer-provided coverage provided to a highly compensated participant under
any discriminatory employe welfare benefit plan.
(k) Contributions made by an employer for IRC
401(k) plans under a cafeteria plan under which the employe unilaterally may
elect to have the employer either make the payments as contributions to a
401(k) plan or other plan on behalf of the employe or to the employe directly
in cash are not excludable from the employe's compensation.
(l) Except as provided in §
101.6a (relating to fringe
benefits in the form of use of property or services), compensation is taxable
regardless of the form of the payment. Examples of taxable forms of payment
include:
(1) Cash.
(2) Foreign currency.
(3) A check or other negotiable
instrument.
(4) Freely
transferable, readily marketable obligations or other cash
equivalent.
(5) Tangible property
interests, intangible personal property or other rights, claims or things that
either:
(i) Can be enforced in courts of
equity and transferred and have an ascertainable fair market value.
(ii) Can be reduced to cash or eliminate an
expenditure.
(6) A
monetary payment in reimbursement of a personal expenditure or to eliminate a
personal expenditure.
(7)
Below-market rate loans.
(8) A
cancellation of indebtedness constituting a quid pro quo or incentive that
would be taxable had the amount by which the debt had been forgiven or
discharged instead been paid to the debtor in cash or property.
(m) For purposes of this section:
(1) A person who separated from service
before satisfying superannuation requirements shall be deemed to be retired
from service upon reaching retirement age, regardless of whether he has
permanently and wholly withdrawn from active working life or not.
(2) The voluntary discontinuance of a plan
within 3 years after it has taken effect, for any reason other than business
necessity, will be evidence that the plan was temporary and limited.