This page includes information that addresses many of the common questions received by Corporate Tax, Compliance, and Payroll about the taxability of various income components. Where applicable, we feature references to supporting documentation from the IRS and other resources.
Assignment of Income
Income earned is generally taxable to the payee at the time payments are made available to them.
The assignment of income doctrine provides that an individual who assigns their right to receive income, rather than receiving the income directly, retains the tax liability associated with that income. Under this doctrine, an individual is not allowed to shift the taxation of income by making a gift or gratuitous transfer of income to another individual or organization, including the University. The assignment of income doctrine is summarized in IRS Revenue Ruling 69-102.
Travel Meal Reimbursement
In order for travel meal reimbursements to be excludable from wages, employees must be traveling away from their tax home on their employer’s business. The tax home encompasses the general area of the taxpayer’s place of business. Traveling “away from home” means:
- Employee must be traveling away from the general tax home area substantially longer than an ordinary day’s work, and
- Employee needs to obtain substantial sleep or rest to meet the demands of the work while away from home.
The IRS does not specifically define sleep or rest, but the Tax Courts have determined that sleep or rest is one that requires the securing of lodging.
- U.S. v. Correll, Barry v. Commissioner, Unger v. Commissioner Thunstedt, T.C memo 2013-280 and Rehman, T.C. Memo 2013-71.
- IRC §1.62(a)(2), Rev. Ruling 75-170, Rev. Ruling 75-432.
- See Publication 463, Travel, Entertainment, Gift, and Car Expenses; Publication 5137 Fringe Benefit Guide.
Business Use of Home
Please refer to this PDF Flowchart
The costs of commuting to and from work are not deductible, neither as trade or business expenses or as expenses incurred in the production of income. Instead, they are nondeductible personal expenses. The cost of commuting to and from work is not deductible even if it is essential to the taxpayer’s pursuit of business activities that they have their car with them at work, or even if the taxpayer is on call and thus must have access to speedy and reliable transportation to their place of employment.
Compensation Assigned to Charity
A taxpayer generally cannot avoid the tax on compensation paid for services they perform by having the amounts given directly to charity. (Primm, T., (1933) 28 BTA 13.)
If a person renders services to a third party for the benefit of a charitable organization, any amount paid under an agreement or understanding to the charity by the third party for those services is income to the person performing the services. It does not matter if the commitment to pay the earnings directly to the charity is made before the services are rendered. (14 Reg § 1.61-2(c) ; Rev Rul 58-495, 1958-2 CB 27)
Dues Paid to Charitable Organizations
Membership dues paid to charitable organizations or other qualifying professional organizations are not deductible as charitable contributions if by reason of such membership, the taxpayer receives benefits or privileges, such as publications, the use of a library, free or reduced admissions to concerts, lectures, etc.
Many cultural organizations (e.g. tax-exempt museums and symphonies) also solicit “sustaining” and similar members who pay much higher dues for the privilege of being known as benefactors of the organization. Where such dues have a dual character because of the great discrepancy between payments and benefits, the IRS will give due consideration to the possible separation on a uniform basis of that portion of the total payment that may properly be treated as a charitable contribution.
Employee Gifts and Awards
The University of Pennsylvania recognizes the services of its employees while complying with federal, state, local, and or other sponsor guidelines. The University of Pennsylvania establishes cost-effective practices that are consistently applied.
On occasion the University or an individual department, school, or center will recognize employees for outstanding work-related achievement, a significant contribution, or a major milestone such as a promotion or retirement.
When these occasions arise, we are reminded that:
- Federally sponsored funds should never be used to charge employee gifts, morale building events, or celebratory/work related achievement events;
- Departmental funds may be used at the discretion of the department within the criteria of this policy and the departmental budget.
The following guidelines have been developed according to the IRS regulations concerning gifts and awards to employees.
This policy does not cover ordinary business expenses in the promotion of employee morale. Examples of such business expenses are: occasional business lunches and office gatherings. Nor does this policy cover performance-based awards or bonuses, which are generally taxable to the recipient and are processed through Payroll.
This policy is not applicable to prizes/awards given for established student events.
Furthermore, this policy does not preclude individual faculty or staff members from giving personal gifts to their colleagues provided University funds are not used for this purpose. Such personal gifts will not be reported as taxable income to the recipient.
It is not appropriate to spend any University funds in recognition of employees for non-work-related achievement or events such as birthdays, holidays (Christmas, Hanukkah, Kwanza, etc.) weddings, baby showers, housewarming, etc.
Gifts and awards received by employees are taxable and must be reported as additional earnings if their value exceeds the following thresholds:
- Cash or gift certificates of any value
- The IRS considers gift certificates, gift cards, or any savings bond to be a cash equivalent even if the property or service acquired with the gift certificate would normally be excludable.
- Gifts or awards of tangible personal property with a value greater than $100
- Gifts and awards of tangible personal property to employees are “de minimis” when they are awarded infrequently and are not greater than $100.
- Gifts or awards of tangible personal property greater than $400 for a length of service or retirement award
- These awards may not be made within the employee’s first five years of service or more frequently than every five years.
All taxable gifts and awards will be net of Federal, State, City, and FICA payroll taxes. In other words, the total expense charged to the departmental funding source will equal the specified award amount; however the amount received by the employee will be net of the applicable taxes withheld.
Work-related Achievement Award Guidelines
Recognition may take the form of celebratory events such as a department-wide luncheon, dinner, or party. Appropriate circumstances for such recognition include:
- To mark achievement of a major departmental goal;
- To honor an employee in connection with a work-related employee recognition program;
- To honor an employee who is leaving the University or department;
- To honor a retiree (other than University wide recognition programs).
These costs should be treated consistent with the University’s general business expense guidelines.
Recognition may also be in the form of a gift. Appropriate circumstances for recognition by gifts include:
- To honor an employee for achievement of a work-related goal or objective (non-bonus);
- To honor a long-service employee, outside of a University-wide recognition program;
- To honor an employee departing the University or department.
What May Not be Charged
Celebratory events and gifts to honor an individual for personal reasons (e.g., wedding, baby shower, birthday, housewarming, holiday, etc.) may not be charged to University funds. Personal funds should be used to pay for these and other kinds of staff parties and for gifts for such events.
Flowers: The University will not pay or reimburse for payment of flowers, other than flowers of nominal cost sent upon the hospitalization of an employee or a death in the employee’s family.
Holiday Cards: The University will not pay or reimburse for payment of holiday cards for interoffice mailing. External mailings are allowable for purposes such as alumni and donor relations.
Taxability of Awards to Employees
|Cash and gift certificates of any value||Taxable|
|Tangible personal property – occasional and value not greater than $100||Non Taxable|
|Tangible personal property – value greater than $100 (does not include a length of service or retirement gift)||Taxable|
|Tangible personal property – valued in the range of $0 – $400 for length of service or retirement||Non Taxable|
|Tangible personal property valued greater than $400 for length of service or retirement. (Only the amount greater than $400 is taxable or reportable.)||Taxable|
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Graduate students and the staff who support them should review the resources below to better understand the taxability of their graduate stipends.
Reimbursement of Sabbatical Expenses
The IRS would allow sabbatical expenses to be reimbursed if: 1.) It is for research purposes; 2.) The the research is in the employee’s field of study; and 3.) The the research cannot be performed elsewhere. As long as the three criteria are met, taxability should not be an issue for reimbursement of the travel expenses, regardless of a salary or no salary. If all three criteria are met, send the reimbursement to Travel.
In order to be prepared for an audit, a document stating the following needs to be included with the travel receipts:
- The University requires the employee to conduct the research (to prove that the research is not for personal reasons)
- What is the purpose of conducting the research and how will it benefit the University of Pennsylvania
- A statement that the research is in the employee’s field of study
- Why the research is being conducted at a location other than the University of Pennsylvania
The Tax Reform Act repealed the employee deduction and income exclusion for moving expenses. Therefore, reimbursement of qualifying moving expenses reimbursed in 2018 and forward are recognized as taxable income for the employee. No longer can qualified relocation expenses be reimbursed tax-free. The request for relocation reimbursement must be made through payroll as an additional pay.
Taxation of Student Prizes
Cash, gift certificates, and other cash equivalents are taxable income to students regardless of value. The giving of these items as prizes is strongly discouraged.
Scholarship prizes won in a contest are not scholarships or fellowships if you do not have to use the prizes for your education. If you can use the prize for any purpose, the entire amount is taxable.
Taxable Scholarships and Fellowships
If you received a scholarship or fellowship, all or part of it may be taxable, even if you did not receive a Form W-2. Generally, the entire amount is taxable if you are not a candidate for a degree.
If you are a candidate for a degree, you generally can exclude from income that part of the grant used for tuition and fees required for enrollment or attendance, or fees, books, supplies, and equipment required for your courses.
You cannot exclude from income any part of the grant used for other purposes, such as room and board.
Prizes and Awards
Prizes and awards are amounts received primarily in recognition of religious, charitable, scientific, educational, artistic, literary, civic achievement, or as the result of entering a contest. All prizes and awards (with the exception of qualified scholarships) are includible in gross income (Code Sec. 74 (a); Reg. § 1.74-1(b)) unless all of the following conditions are met:
- The recipient was selected without any action on his or her part to enter the contest.
- The recipient is not required to render substantial future services as a condition to receive the prize or award.
- The prize or award is transferred by the payer to a government unit or tax-exempt charitable organization as designated by the recipient.
All three of the above conditions must be met in order to exempt the prize from taxation.
IRS Reporting Requirements
For U.S. and resident alien students, all prizes in the amount of $600 or greater must be reported by the University to the IRS on form 1099-MISC. It is the responsibility of all prize recipients, regardless of the amount of the prize, to report the taxable prize received to the IRS on their personal income tax returns.
For non-resident alien students, the University is required to withhold 30% tax on the full amount of the prize unless the individual is exempt from taxation under a tax treaty. Contact Corporate Tax, Compliance, and Payroll at firstname.lastname@example.org or Room 308 Franklin Building (between 10 am and 2 pm) to determine treaty eligibility. The prize amount will be reported to the IRS and to the student on form 1042-S.
Department Reporting Responsibilities
For prizes of $600 or more issued to U.S. students and resident alien students, the following documentation must be forwarded to Accounts Payable:
- The student name and address
- A W-9 with the student’s social security number
- Value of the prize
For all prizes issued to non-resident alien students, the following documentation must be forwarded to Accounts Payable:
- The student name and address
- Value of the prize
- University of Pennsylvania Foreign National Information Form
- A copy of the student’s I-94 Card, Visa, Passport, and I-20 / DS 2019 or I-797
Note: If the non-resident alien student is an employee of the University, only the student’s name, address, and prize value is required to be forwarded to Accounts Payable.
It is important to inform the recipients of the income tax consequences of their winnings. Even in situations where the University is not required to report winnings, the recipients are responsible for reporting such payments on their individual tax returns.
The University is not in the position to offer specific tax advice. It is recommended that the student consult with a tax professional.