Payroll Services Mailbag: Valid W-4, parking stipends and more

Editor of Business Management Daily’s Payroll Legal Alert, and employment tax compliance expert Alice Gilman answers your payroll questions in this roundup of Payroll Services Mailbag.

Are expenses paid directly to third parties still taxable?

Question: The company has an account with a car service. The car service bills us directly, so employees aren’t reimbursed. Are these amounts still taxable to employees, even though they never receive cash?

Answer: Maybe. Employees must still satisfy the accountable plan rules in order for any payment made on their behalf to be excluded from their income. Paying the car service’s bills essentially functions as an advance to employees. They still need to substantiate the time, place and business purpose of their use of a car. In other words, you know when the expense was incurred, where it was incurred and how much. But you don’t know why the expense was incurred and that’s the key.

Are parking stipends excludable as transportation fringes?

Question: Our subsidy of employees’ parking expenses is less than $265 a month. We’re having trouble finding additional parking in lots near our office. To remedy this, we’d like to provide employees with a monthly stipend of, say, $50 so they can find their own parking. Since these stipends are less than $265, would they remain tax free as qualified employer-provided parking?

Answer: No. The amount of your stipend isn’t relevant. Parking benefits can only be reimbursed and only after employees substantiate their expenses to you. For example, the parking lot operator could provide you with daily electronic receipts directly or it could provide employees with daily receipts or punch a card, which employees turn over to you at the end of the month. Without some sort of substantiation, these expenses are fully taxable.

Odd apostrophe in first name causes W-2 consternation

Question: HR entered a new employee’s first name as Ja’Net, which is what it said on her Social Security card. Now it’s W-2 time and Payroll doesn’t know how to report this. Should we drop the apostrophe and combine the letters into one first name, like we do for a surname?

Answer: Removing the apostrophe probably won’t make any difference to the Social Security Administration. The SSA matches employees’ last names and Social Security numbers, so as long as those match, the SSA should be able to post her earnings to her account.

Name or gender problem: we can’t decide

Question: During an exit interview, a terminating employee wrote in a male name, when the employee was originally entered into the payroll system as a woman. We have since been informed that the employee is transgender. This doesn’t solve our problem of what we should report on this employee’s W-2. Any suggestions?

Answer: This is a name change question, not a gender change question. It’s not too late to use the Social Security Administration’s Social Security Number Verification Service to determine whether this employee’s name and SSN match the SSA’s records. You should also reach out to your former employee to see if he contacted the SSA regarding the name change. If he hasn’t, you should use the name on his Social Security card on his W-2.

No, this isn’t a valid W-4

Question: HR forwarded a new employee’s W-4 to Payroll. The employee, who’s married, indicated that she wants to be withheld at the single rate. But she also completed Line 6, indicating that she wants income tax withholding to apply to 100% of her wages. We reached out to her and she said HR approved this. Can she do this?

Answer: No, HR is incorrect—employees are withheld on 100% of their taxable wages. This is an invalid form. Married employees can opt for withholding at the higher single rate, but this employee is suggesting that she get paychecks of $0. The instructions for Line 6 state employees must indicate a flat dollar amount if they want extra withholding. To withhold as this employee desires, she would have to calculate this herself and indicate that amount on Line 6.

No, that’s not the employee’s official start date

Question: HR wants new hires to start on Wednesdays, instead of Mondays, but still pay them for Monday and Tuesday. As it happens, Payroll takes care of I-9 documentation and new hire reporting. We disagree with HR. If the first day new hires are physically present is Wednesday, but their hire date is Monday (because that’s the day they’re paid), would we have to terminate them and send them home if they don’t bring their ID documents?

Answer: This is problematic. For both I-9 and new hire reporting purposes, the date of hire is the first day an employee is put on the payroll, which in your case is Monday. You could also run into wage-and-hour problems if employees are nonexempt. The safest course is to keep their first day of work as Wednesday, but instead of paying them for Monday and Tuesday, pay bonuses later.