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Unpaid Company Loan - Considered Compensation? Florida

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  • Unpaid Company Loan - Considered Compensation? Florida

    My Company offers Interest Free Loans for such things like Computers, Generators, etc. We recently had some layoffs, and HR chose to "forgive" any outstanding Loans to those employees laid off.

    My question: Should the remaining unpaid balance of the forgiven Loan be treated as Compensation (to appear on employee's W-2)?

  • #2
    Yes. From The Payroll Source Book, by the American Payroll Association:

    "If the employer forgives the debt, or for any other reason the employee is not expected to repay the loan, the entire balance of the loan becomes income subject to federal income tax withholding and social security, Medicare and FUTA taxes in the year the debt is forgiven". IRC 7872; IRS Prop. Reg 1.7872-1; IRS Temp Reg 1.7872-5T
    "Reality is that which, when you stop believing in it, doesn't go away".
    Philip K. **** (1928-1982)

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    • #3
      Thank you for the quick reply... One additional question regarding the amount to be treated as compensation:

      If the Company wishes to pay the taxes on the employees behalf, could we (Payroll) gross up the remaining balance of the loan so that the employer pays the tax liability?

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      • #4
        Sure, you can do that.
        I don't respond to Private Messages unless the moderator specifically refers you to me for that purpose. Thank you.

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        • #5
          What a nice thing for the co. to do.
          Too often we underestimate the power of a touch, a smile, a kind word, a listening ear, an honest compliment, or the smallest act of caring, all of which have the potential to turn a life around. Leo Buscaglia

          Live in peace with animals. Animals bring love to our hearts and warmth to our souls.

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          • #6
            Maybe, although if the employer fails to recovery the taxes from the employee, then the employer MUST pay the taxes themselves (gross up). Which is another way of saying that any time the employer lends an employee money or property, the employer might end up being forced into a gross up situation should all else fail.
            "Reality is that which, when you stop believing in it, doesn't go away".
            Philip K. **** (1928-1982)

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            • #7
              As in, "no good deed".
              I don't respond to Private Messages unless the moderator specifically refers you to me for that purpose. Thank you.

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              • #8
                I'm not a payroll person but I thought they (the co.) were planning on paying the taxes per the one post. I still think it's a nice thing for the co. to do. The taxes shouldn't be as much as the loan should they even if the employee had to pay them?
                Too often we underestimate the power of a touch, a smile, a kind word, a listening ear, an honest compliment, or the smallest act of caring, all of which have the potential to turn a life around. Leo Buscaglia

                Live in peace with animals. Animals bring love to our hearts and warmth to our souls.

                Comment


                • #9
                  I do not remember the formula anymore, although I could probably figure it out. There have been good online payroll calculators available for a long time, and easy access to calculators makes people stupid. The key is that some taxes such as FICA-SST or CA-SDI can in theory cap. Also really dumb employers could use something other then the Flat Tax methods for the gross up. I have worked for several employers who thought that was a good idea for some reason, probably because the person who thought it was a good idea did not have to do the work themselves. Payroll people never like gross ups because they are the one's who have to make it work.

                  http://www.paycheckcity.com/netpayca...calculator.asp
                  "Reality is that which, when you stop believing in it, doesn't go away".
                  Philip K. **** (1928-1982)

                  Comment


                  • #10
                    Oh. Thanks for the information, DAW.
                    Too often we underestimate the power of a touch, a smile, a kind word, a listening ear, an honest compliment, or the smallest act of caring, all of which have the potential to turn a life around. Leo Buscaglia

                    Live in peace with animals. Animals bring love to our hearts and warmth to our souls.

                    Comment


                    • #11
                      "If the employer forgives the debt, or for any other reason the employee is not expected to repay the loan, the entire balance of the loan becomes income subject to federal income tax withholding and social security, Medicare and FUTA taxes in the year the debt is forgiven". IRC 7872; IRS Prop. Reg 1.7872-1; IRS Temp Reg 1.7872-5T


                      DAW - The above quote and reference to IRS Code & Regulations... is there any way I can get the actual IRS Code (when I try on their website and enter the 7872 in search, I can not seem to locate the quote above).

                      Thanks for your help.

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                      • #12
                        The IRC reference is easy. I will cite one of the several free online sites I know of for that.
                        http://www.fourmilab.ch/ustax/www/sections.html

                        The IRS regulations are harder. Technically everything the government publishes can be found at the following website. However that website hates me. It seems to hate a lot of people. I know people who claim to be able to get that site to work, but I am not one of them, and I know other people who have given up on using that website. I generally just use BNA for IRS regulations, but that is a paid access site (members only). I have not tried to use that site (govermental publishing office) in a number of years, and maybe they have since fixed it. Or not.
                        http://www.gpo.gov/nara/cfr/cfr-table-search.html
                        Last edited by DAW; 10-05-2009, 08:43 AM.
                        "Reality is that which, when you stop believing in it, doesn't go away".
                        Philip K. **** (1928-1982)

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