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¶2130-Employee-Related Expenses §62
Employer "tool plan" providing reimbursement to employees violates §62's business connection requirement where wages fluctuate depending on whether reimbursements are paid thus, payments considered income, the Chief Counsel's Office advised.
Employer (E) participates in a tool plan administered by a third party. Prior to enrollment in the tool plan, E compensates its employees on an hourly wage basis, with no specific amount attributed to the provision of tools or equipment. After enrollment, the employees' hourly wages are split into two components- a reduced hourly wage and a tool plan payment calculated as a set percentage of the hourly wage, the latter treated as exempt from employment taxes.
Tool payments are made to employees as purported nontaxable reimbursement for the cost of the tools they are required to provide...