The Internal Revenue Service (the “IRS”) recently issued Chief Counsel Advice 201810007 requiring the fair market value of tax preparation services provided by a large US company to its employees who frequently transfer their employment from a country to country is included in gross employee income. . The key points of the guide are as follows:
- Tax preparation services provided by the employer are not considered a working condition margin that can be excluded from gross income. Filing income tax returns is a personal obligation of the employee. By fulfilling the employee’s personal obligation, the employer’s payment of the employee’s personal expenses translates into taxable income for the employee.
- The amount that can be included in income is the fair market value of the tax preparation services. It is determined by the amount the employee would have to pay in an arm’s length transaction. Therefore, payment for services by the employer or the subjective belief of employees as to the value of the benefit is irrelevant in determining fair market value. However, when data on arm’s length transactions are not available, the amount paid by the employer could be used as the best indicator of fair market value.
- The fair market value of tax preparation services is subject to FICA taxes, unless an aggregation agreement between the United States and the foreign country can apply to determine the taxation of Social Security services. preparation of tax returns provided by the employer.
- The fair market value of tax preparation services is subject to income tax withholding unless the employer has reasonable grounds to believe that the value of the services would be excluded from the employee’s gross income in under Article 911 of the Code, or if the employer is required by foreign law to withhold the income. taxes on this value in foreign countries.
In summary, when the employer provides tax preparation services to its employees working in the United States, they must include the fair market value of those services in the gross income of the employees and withhold income tax. and FICA taxes accordingly. For U.S. employees who work in its international offices, the employer should consult relevant agreements, regulations, and laws to determine FICA’s withholding and income tax requirements.