What payrolls or compensation are NOT chargeable at audit?

Our previous post,  What Payrolls Do I Need to Have for an Audit  ,  goes through all types of compensation that an auditor will include at the audit, but what about those payrolls that are not chargeable on an audit?

The complete list of “Excluded Remuneration” can be found here.

Pay close attention as some have huge implications, like tips in the restaurant industry!  In this case, tips are reported on the quarterly unemployment reports, but are not chargeable at the audit!

2. Excludes:

(Additional Rules: AR, FL, IL, IN, KS, KY, LA, ME, NM, OK, OR, SD, UT) (Exceptions: AK, CO, CT, KS, MD, MS, MT, NM, NV, OR, TN, VA) (User’s Guide: FL, KY)

a.     Tips or other gratuities received by employees.  

b.     Payments by an employer to group insurance or group pension plans for employees, other than those covered by Rule 2-B-1-f and Rule 2-B-1-m.  

c.     Payments by an employer into third-party trusts for the Davis-Bacon Act or a similar prevailing wage law provided the pension trust is qualified under IRC Sections 401(a) and 501(a).  

d.     The value of special rewards for individual invention or discovery.  

e.     Dismissal or severance payments except for time worked or vacation accrued.  

f.     Payments for active military duty.  

g.     Employee discounts on goods purchased from the employee’s employer.  

h.     Expense reimbursements to employees to the extent that an employer’s records confirm that the expense was incurred as a valid business expense.

Reimbursed expenses and flat expense allowances (except for hand or hand-held power tools) paid to employees may be excluded from the audit only if all three of the following conditions are met:

(1)     The expenses are incurred for the business of the employer

(2)     The amount of each employee’s expense payments or allowances are shown separately in the records of the employer

(3)     The amount of each employee’s expense reimbursement is a fair estimate of the actual expenses incurred by the employee in the conduct of his/her work

Refer to User’s Guide for an example.

Note:   When it can be verified that the employee was away from home overnight on the business of the employer, but the employer did not maintain verifiable receipts for incurred expenses, a reasonable expense allowance, limited to a maximum of $30 per day, is permitted.

i.     Supper money for late work.  

j.     Work uniform allowances.  

k.     Sick pay paid to an employee by a third party such as an insured’s group insurance carrier that is paying disability income benefits to a disabled employee.  

l.     Employer-provided perks such as:

•     Use of company-provided automobiles

•     Airplane flights

•     Incentive vacations (e.g., contest winners)

•     Discounts on property or services

•     Club memberships

•     Tickets to entertainment events



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