Many of my hospital clients have an increased incidence of providing temporary housing for locums, temps and some employees and, as a result, have questions regarding the proper tax reporting to these individuals.
First things first: the employment status of the individual needs to be determined before anything else.
If the person is an independent contractor (for example, a locum paid through an agency), a Form 1099-Misc usually needs to be filed for payments made to the individual (or agency) of $600 or more. A 1099-Misc is not required in the following circumstances:
- The payment is made to a corporation or a tax-exempt organization.
- Payments for travel reimbursement are excluded as long as they are paid under an accountable plan (which itself can be another topic for a blog). For example, an independent contractor submits a timely expense report to you with their lodging receipts for reimbursement. The amounts for the expense reimbursement do not have to be included on the 1099-Misc. If you pay the travel expenses directly or provide the housing, you also do not have to include these payments on the 1099-Misc.
If the individual is an employee, you should follow the guidance in IRS Publication 15-B, which can be found on www.irs.gov.
The basic rule of thumb is that every fringe benefit provided to an employee is a taxable benefit unless there is an exclusion listed in Publication 15-B.
The lodging exclusion begins on page 15 (of the 2016 publication), and there is an example regarding a hospital listed near the bottom of that page in the left column. For lodging to meet the exclusion, it must pass three tests:
- The lodging must be furnished on your business premises. I’ve seen some guidance that allowed the exclusion when the lodging was in close proximity to the business premise (within a mile, etc.).
- The lodging is furnished for the employer’s convenience. The employer furnishing the lodging to the employee must have a substantial business reason for doing so other than to provide the employee with additional pay. For example, the employee is on call for emergencies 4 or 5 days a week, so must live in close proximity to the hospital.
- The employee must accept the lodging as a condition of employment. The employer must require the employee to accept the lodging because they need to live on your business premises to be able to properly perform their duties. We recommend including this condition of employment directly in the employee’s written employment contract.
If lodging does not meet all three of these tests, then it must be treated as a taxable fringe benefit with the appropriate payroll taxes withheld from the employee’s pay.
If you are also providing meals, the discussion on employer-provided meals also begins on page 15 of Publication 15-B, with the discussion for meals provided on your business premises starting on page 16.
A discussion related to transportation benefits begins on page 18. We have also had some questions from clients regarding transportation. For example, one client had an employee who dropped down to part-time status and moved from Maine to Florida. The employee agreed to continue working at the hospital one week a month, and the hospital agreed to pay for the flight back and forth. The individual continued to be treated as an employee. The flight is the employee’s commuting expense, and there is no exclusion for reimbursement of commuting expenses. Therefore, the flights had to be included in the employee’s compensation and reported on his W-2.
Many of these taxable benefits are being paid through an accounts payable system rather than payroll, and so can be easily missed. Withholding for these benefits at each pay period is much easier to accomplish rather than all at once at year end. It’s important for your HR department to communicate with the payroll office whenever unusual employment terms and benefits are being offered to employees to ensure proper tax treatment.
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