DOCUMENTS PAGE |
Date: 11/22/99
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Problem Statement
Risk
Recommendation
Examples of personal funds that should not be used for reportable or taxable transactions:
Note: Employee reimbursements, including petty cash, are processed using web voucher. See Appendix A - System Implications.
See Appendix B - Examples of Third Party Payment Situations, for recommended processing or system alternatives.
See Appendix C - IRS Compliance Rules for definitions and background information related to common third party payment situations at Harvard.
Definition of Third Party Payments
Examples of third party payments common to Harvard include the following:
In these instances, Harvard may be obligated to report or withhold taxes on payments made on behalf of the service provider or beneficiary of the gift to the IRS on Forms W-2, 1099 or 1042-S.
Note: Based on an informal sample of other universities, purchasing card systems do not provide information for tax reporting. Like Harvard, these universities restrict the use of the purchasing card in reportable or taxable situations.
See Harvard's Purchasing Card Manual, page 5 Restricted Commodities.
Appendix B - Examples of Third Party Payment Situations Current Practice Risk Recommended Practice Employee pays non-incorporated caterer with cash or a personal check and seeks reimbursement via Web Voucher Reimbursement. High System does not permit IRS reporting Employee pays non-incorporated caterer with GE mastercard and seeks reimbursement via Web Voucher reimbursemen. High System does not permit IRS reporting Non-incorporated caterer provides itemized invoice processed via Web Voucher. Low System permits IRS reporting
Local units are strongly encouraged to request and review copies of all receipts. These copies are not forwarded to AP but are retained by the local unit.
Non-incorporated caterer retains his/her original receipts. Note: It is the responsibility of the caterer to report and deduct travel and other expenses when filing personal, annual tax returns.
Current Practice Risk Recommended Practice Employee pays server with cash or a personal check and seeks reimbursement via Web Voucher Reimbursement. High System does not permit IRS reporting Employee pays server with GE mastercard and seeks reimbursement via Web Voucher reimbursement. High System does not permit IRS reporting Server provides itemized invoice processed via Web Voucher. Low System permits IRS reporting Same as non-incorporated caterer above. Current Practice Risk Recommended Practice Employee pays with cash or a personal check and seeks reimbursement via Web Voucher Reimbursement. High System does not permit IRS reporting Employee pays with GE mastercard and seeks reimbursement via Web Voucher Reimbursement. High System does not permit IRS reporting Department completes Extra Compensation Form and employee is reimbursed by Payroll Low System permits IRS reporting Department completes Extra Compensation Form and employee is reimbursed by Payroll
Employees seeking reimbursement for third party payments expose Harvard to risk of non-compliance with IRS reporting or withholding rules. See risk . Of our financial systems or processes, only Web Voucher and the Payroll Extra Compensation Form support IRS reporting rules for third party payments.
See Appendix A System Implications.
Failure to report all applicable payments on Forms W-2, 1099 or 1042S, as applicable, subjects Harvard to possible fines and penalties upon audit by the IRS.
Harvard will continue to reimburse employees for all properly substantiated business expenses. However, it is strongly encouraged that employees do not use "personal funds" and seek reimbursement for any payment that may be reportable or taxable.
A situation where an employee uses personal/out-of-pocket funds to pay for and subsequently be reimbursed for a transaction that is reportable or taxable to another party.
Situation: Employee hosts a catered Harvard business function. Employee pays the non-incorporated caterer with personal funds.
Not Recommended
Not Recommended
Preferred
Non-incorporated caterer provides itemized invoice processed via Web Voucher. Local unit requests non-incorporated caterer to include fees, travel and other expenses on the invoice.
Situation: Employee hosts a catered Harvard business function. Employee pays service personnel (e.g., waiter, valet, bar tender) with personal funds.
Not Recommended
Not Recommended
Preferred
Legend:
Preferred - the option preferred by the Center- permits tax reporting
Situation: Employee purchases gift certificate for another employee.
Not Recommended
Not Recommended
Preferred
Not Recommended - while doable, not preferred by the Center- does not permit tax reporting
Appendix C - IRS Compliance Rules
Non-incorporated Service Providers
The IRS requires that Harvard report service payments to non-incorporated vendors in an amount equal to or exceeding $600 on Form 1099 (note: purchases of goods from non-incorporated vendors are not subject to reporting on Form 1099). The $600 threshold relates to the cumulative total payments for the year from all Harvard sources (e.g. Harvard must report on Form 1099 where a non-incorporated vendor is paid $60 per month for services, $720 for the year). US source income service payments to non-resident aliens of any amount must be reported on Form 1042S and may also require that taxes be withheld at the time payment is made.
Note: Non-incorporated vendors are required to report all income from services, even if less than Harvard's $600 reporting requirement.
Cash and Gift Certificates (any denomination)
Gift certificates, regardless of dollar amount, are treated as taxable income to the recipient. At Harvard, gift certificates are considered extra compensation for employees and will be reflected on their Form W-2's with taxes withheld as appropriate. For non-employees that are US citizens or permanent residents, income from gift certificates will be reflected on Form 1099 with no taxes withheld. For non-employees that are non-resident aliens, income from gift certificates will be reflected on Form 1042S with taxes withheld as appropriate.
Non-Cash Gifts
Defined as a transfer for which the dominant motive is detached or disinterested generosity or affection, respect, admiration, charity or like impulses.
- Gifts given to individuals who have no Harvard affiliation and have not performed services for Harvard will generally be considered to result from disinterested generosity and have no income tax implications.
- Generally, gifts transferred between employees (with Harvard funds) are not excludable from income as gifts, no matter what the motivation. Instead, transfers are viewed as recognition of the employee's employment and are generally treated as compensation regardless of dollar amount. This is true for independent contractors as well.
Note: However it is Harvard policy that non-cash gifts valued at less than $75 will not be reported as compensation. See definition of deminimus fringe benefits below.
Definitions
Deminimus Fringe Benefits - non-cash gifts and awards whose value is too small (less than $75 per Harvard policy) to make tracking and reporting reasonable or administratively practical
Goods - tangible personal property having an intrinsic value (e.g., office and lab supplies)
Non-incorporated Vendor - an individual or sole proprietorship
Services - work performed for the benefit of another (e.g., catering, consulting)
Source: FAD/ACTTS