University Department Frequently Asked Questions
Q1: When we make a payment to anyone who turns in a receipt or uses a meal per diem, the payment is not taxable right?
A1: Unfortunately, turning in receipts does not automatically make a payment tax-free. The first principal in tax law is that everything received is taxable unless there is an exception. If the payment is considered a business expense for the individual incurring the expense - which is not the same as Kent State's business purpose- then we can use the IRS accountable plan rules to except the payment from taxation. Other exceptions to consider include de minimis non cash fringe benefits, no additional cost benefits, qualified retirement plan contributions and qualifying healthcare benefits.
Q2: If it isn't a business expense then what is it?
A2: It depends upon the reason it is paid. If it is for the education of a student who does not render services to Kent State or it is for participation in a training program or symposium, then it is considered a non-service scholarship. Non-service scholarships fulfill Kent State University's business purpose but the individuals receiving payment are not incurring the expenses in a business.
Q3: So you are saying I have to tell the student that they need to pay tax even though they already spent the entire amount of the payment on an expense?
A3: No, we do not advise students on the taxation. However, we do need to inform the student that the payment is considered a non-service scholarship so that the student can determine the tax consquences. Since non-service scholarships to US citizens, permanent residents and resident aliens are not reported on Form 1099, it is often helpful to provide the student a scholarship letter that includes information about the payment and amount. If the student is a nonresident alien, in addition to providing the student a nonresident alien scholarship letter, then we may have to report and possibly withhold federal income tax on the payment and report it on Form 1042 regardless of the amount.
Q4: I am giving a graduate travel award to present research at a conference and it is part of his duties as a graduate assistant. Is this a non taxable business expense reimbursement?
A4: It depends. How much is the award and how much did he spend for the trip?
Q4a: The award is $500 (all graduate students in our department are eligible or this amount) and the total incurred was $1,210.
A4a: To be a non taxable business expense reimbursement, the primary reason for the reimbursement must be for the job duties. Because all graduate students are eligible for the same amount whether they are graduate assistants or not, it appears as though it was more for the individuals education. The fact that you are not reimbursing the entire cost leaves further doubt to treating it as a business expense reimbursement.
Q1: I am paying a business for services. Do I need advance HR approval?
A1: It depends upon the business structure. The HR approval is in place to document that services are not required to be reported on a Form W-2 instead of Form 1099. For this reason, HR approval is required for any relationship that the payee reports the income on Form 1040. Individuals, including DBA's and sole proprietorships and most single member LLC's report income on Form 1040. Corporations, S-Corporations and partnerships are separate from the owners and report income do not report income on Form 1040 and we cannot issue a non-individual a Form W-2, therefore there is no need for HR approval on those relationships. Questions about HR approval?