Some employers allow employees to accumulate overtime hours, sick leave, vacation time, etc. and use those hours to take time off from work with full pay. This is often referred to as paid time-off (PTO). What some employers overlook is that the ability to convert unused PTO or sick days to cash constitutes constructive receipt and will subject the employees to taxes even if they do not receive any cash. Constructive receipt of these amounts can also cause payroll complexities for the employer and employee.<\/p>\n
The timing of the taxable event is determined by the \u201cconstructive receipt\u201d rules of IRS regulation 1.451-2(a). The IRS regulation states that income not received in cash is constructively received by a cash-basis taxpayer in the tax year during which the income is credited to the taxpayer’s account, set apart for the taxpayer, or otherwise made available so that the taxpayer may draw upon the income at any time, or so that the taxpayer could have drawn upon it during the tax year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer’s control of the income’s receipt is subject to substantial limitations or restrictions.<\/p>\n
Perhaps looking at a simple example will illustrate how the constructive receipt rules work and how both the employer and employee are affected. Let\u2019s assume that the employer allows employees to accumulate PTO not to exceed 20 days during any calendar year, and PTO days in excess of 20 days can be cashed out by the employee. The employee accumulates 24 hours by December 31 and fails to notify the employer of the employee\u2019s intention to cash out the 4 days of PTO in excess of the 20 days he is allowed to maintain. The employee receives nothing from the employer. Under the constructive receipt rules, the employer is REQUIRED<\/u><\/strong> to include 4 days of pay in the employee\u2019s wage base for the last paycheck that includes December 31 regardless of the fact that the employee received nothing. The fact that the employee had the right to convert his days off for cash constitutes the constructive receipt of the cash.<\/p>\n Naturally the employee paying taxes on \u201cphantom income\u201d will not be a happy camper. Likewise, the employer can find itself subject to penalties for failure to properly withhold federal and state income taxes, Federal Insurance Contributions Act taxes, Federal Unemployment Tax Act taxes, and State Unemployment Tax Act taxes.<\/p>\n If you want to discuss your business or personal tax planning<\/a> and tax preparation<\/a> concerns with an experienced tax professional, we invite you to call 610-594-2601<\/a> today to make an appointment at our Exton PA CPA office<\/a> to discuss your situation. You can also schedule a consultation at Click Here<\/a>.<\/p>\n Some employers allow employees to accumulate overtime hours, sick leave, vacation time, etc. and use those hours to take time off from work with full pay. This is often referred to as paid time-off (PTO). What some employers overlook is that the ability to convert unused PTO or sick days to cash constitutes constructive receipt […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[3],"tags":[],"class_list":{"0":"post-1812","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-irs-tax-planning-ideas-tips-news","7":"entry"},"aioseo_notices":[],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9W9tf-te","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts\/1812","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/comments?post=1812"}],"version-history":[{"count":3,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts\/1812\/revisions"}],"predecessor-version":[{"id":1815,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts\/1812\/revisions\/1815"}],"wp:attachment":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/media?parent=1812"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/categories?post=1812"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/tags?post=1812"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Copyright \u00a9 2015 Keystone Financial Solutions, P.C. All rights reserved. BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.<\/strong><\/h6>\n","protected":false},"excerpt":{"rendered":"