§ 101.6. Compensation.
(a) Compensation includes items of remuneration received, directly or through an agent, in cash or in property, based on payroll periods or piecework, for services rendered as an employee or casual employee, agent or officer of an individual, partnership, business or nonprofit corporation, or government agency. These items include salaries, wages, commissions, bonuses, stock options, incentive payments, fees, tips, dismissal, termination or severance payments, early retirement incentive payments and other additional compensation contingent upon retirement, including payments in excess of the scheduled or customary salaries provided for those who are not terminating service, rewards, vacation and holiday pay, paid leaves of absence, payments for unused vacation or sick leave, tax assumed by the employer, or casual employer signing bonuses, amounts received under employee benefit plans and deferred compensation arrangements, and other remuneration received for services rendered.
(b) Scholarships, stipends, grants and fellowships shall be taxable as compensation, if services are rendered in connection therewith.
(1) When used in this subsection, the following words have the following meanings, unless the context clearly indicates otherwise:
(i) Fellowship stipend or fellowship award—A fixed sum of money paid periodically for services or to defray expenses to a graduate student who is enrolled in a graduate degree program at a university.
(ii) Grant-in-aid—Financial support given by a public agency or private institution to an individual to further the individual’s education.
(iii) Postdoctoral research fellowship stipend or postdoctoral research fellowship award—A fixed sum of money paid periodically for services or to defray expenses of an individual who has obtained a doctoral degree at a university and is conducting research at a research facility.
(iv) Scholarship—A grant-in-aid to a student.
(2) Scholarships, grants, awards and other types of student aid which require no past, present or future services in return for receipt of the funds are not taxable.
Examples:
(i) John has a high school diploma and is currently employed. John’s employer promises to pay for John’s college tuition, room and board for 4 years if John agrees to return to his employer after obtaining his degree and to work for the employer for 4 consecutive years. John’s grant-in-aid is taxable compensation and is subject to Pennsylvania employer withholding and reporting.
(ii) Peter is employed by ABC Company. Peter and ABC Company agree that he will work for them for 1 year without receiving any salary. In return, after that year Peter will attend XYZ College and ABC Company will pay his tuition, room and board for the entire year. ABC’s payment of Peter’s tuition, room and board is taxable compensation and is subject to Pennsylvania employer withholding and reporting.
(iii) John is employed by XYZ Corporation. XYZ Corporation has established a ‘‘Scholarship Program’’ for the children of its employes. The program does not qualify as an employer scholarship program for Federal income tax purposes. John’s child, Erin, receives a ‘‘scholarship’’ from the plan to attend college. The fair market value of the Federally nonqualified scholarship is taxable compensation to John and is subject to Pennsylvania employer withholding.
(3) Fellowship awards or fellowship stipends made to graduate students enrolled in a graduate degree program at a university chartered by a state or foreign country on the basis of need or academic achievement for the purpose of encouraging or allowing the recipient to further his educational development are not taxable. When the fellowship awards or fellowship stipends are made as compensation for past or present employment or in expectation of future employment services they are taxable.
Example:
Jane is enrolled in a graduate degree program in biochemistry at a university. Jane is in the first year of a 3-year graduate degree program. A pharmaceutical company enters into an agreement to pay the remaining tuition, room and board expenses necessary for Jane to obtain her graduate degree. In return, Jane promises to work for the pharmaceutical company for 4 years after graduation. Jane’s receipt of these payments from her future employer constitute taxable compensation.
(4) Fellowship awards and fellowship stipends are taxable compensation for services if the recipient is required to apply his skill and training to advance research, creative work or some other project or activity, unless the recipient can show that the recipient is a candidate for a degree and the same activities are required of all candidates for that degree as a condition to receive that degree.
Example:
Steven is enrolled in a graduate degree program in education at ABC University. Degree candidates are required to teach an undergraduate education course for 5 hours a week to obtain their degree. Steven and two of the other 15 candidates in the degree program are receiving fellowship stipends. If Steven does not perform additional services for ABC University, his teaching will not make his stipend taxable compensation.
(5) For a payment received by a postdoctoral research fellow for conducting research to be excludable from the definition of compensation, the payment shall meet the following conditions. If the payment fails to meet one or more of these conditions, the payment is taxable compensation:
(i) The source of funding for the payment is a governmental agency, a private foundation as described in section 509 of the Internal Revenue Code (26 U.S.C.A. § 509), a Federally exempt organization as described in sections 501(c)(3) or (5) of the Internal Revenue Code (26 U.S.C.A. § 501(c)(3) and (5)), or a public or private university chartered by a state.
(ii) The organization which is permitting the fellow to use its facilities and which is sponsoring the fellow’s research (sponsoring organization) is a governmental agency, a Federally exempt organization as described in section 501(c)(3) of the Internal Revenue Code, or a public or private university chartered by a state.
(iii) Prior to enrollment in the sponsoring organization’s postdoctoral research fellowship program, the fellow has obtained a doctoral degree in a field of study which is related to the field of study being researched by the fellow.
(iv) The amount of the fellow’s stipend or grant is based on the scale established by the source of funding.
(v) Each fellow formulates his own research project or advances his own research project throughout the stipend or grant period.
(vi) The sponsoring agency serves only in an advisory capacity in the selection of research projects and cannot establish or control the fellow’s hours or methods of research except as control relates to legal or regulatory matters.
(vii) The fellow is not required to perform administrative work, teaching assignments or other duties for the sponsoring organization or another entity as a condition for receiving a payment and will not be penalized for not performing these duties.
(viii) The fellow is not required to enter a contractual commitment for future employment with a specified entity as a condition for obtaining or continuing to obtain the payments.
(ix) Payments to the fellow for conducting research are limited to no more than 36 months.
(x) Research results or writings made by the fellow during the program do not become the property of the sponsoring organization or another entity other than the fellow. Patent or copyright royalties or other income derived directly or indirectly from the fellow’s research results or writings may become the property of the sponsoring organization. Income or gain derived from patent or copyright royalties by the postdoctoral research fellow is taxable income to the fellow.
(xi) The fellow is not required to assist employes of the sponsoring organization in conducting research being performed by employes of the sponsoring organization.
Example:
John is a postdoctoral research fellow at ABC Cancer Research Institute. His research is being funded by the National Institute of Health. The sponsoring organization, ABC Cancer Research Institute, requires John to spend half of his time assisting its own employes on their own research project as a condition for sponsoring his research. John’s postdoctoral research fellowship stipend is taxable compensation.
(xii) The fellow does not receive fringe benefits to which an employe of the sponsoring organization is entitled, except to the extent that the benefits are at no additional cost to the sponsoring organization. For purposes of this subparagraph ‘‘fringe benefits’’ means payor provided health, life, disability income or group legal services insurance plans, payor provided automobile and payor provided dependent care assistance, educational assistance plans or retirement benefits.
(xiii) Pennsylvania unemployment compensation premiums are not required to be paid by the sponsoring organization or another entity on behalf of the fellow.
(xiv) Federal social security employment tax is not required to be paid by the sponsoring organization or another entity or the fellow with respect to the fellowship.
(xv) The fellow is not under the coverage of the sponsoring organization’s worker’s compensation insurance plan or policy.
(6) Fellowship stipends paid to medical interns and residents under an internship or residency program which conforms or substantially conforms to standards set by the American Medical Association are taxable compensation.
(c) Compensation does not mean or include any of the following:
(1) Periodic payments for periods of sickness or disability paid by or on behalf of an employer under a program or plan unless the payments are regular wages. Additionally, no amount of damages received (whether by suit or agreement and whether as lump sums or as periodic payments) if pain and suffering, emotional distress or other like noneconomic element was, or would have been, a significant evidentiary factor in determining the amount of the taxpayer’s damage. No payments made by third-party insurers for periods of sickness or disability would be considered payments of regular wages. A program or plan where any of the following occur would not be considered payment of regular wages:
(i) The periodic payments have no direct relationship to the employe’s usual rate of compensation.
(ii) The periodic payments are computed with reference to the nature of the sickness or disability and without regard to the employe’s job classification.
(iii) Periodic payments would be reduced by payments arising under Workmen’s Compensation Acts, Occupational Disease Acts, Social Security Disability or similar legislation by any government.
(iv) The periodic payments exceed the employe’s usual compensation for the period.
(2) Disability, retirement or other payments arising under workmen’s compensation acts, occupational disease acts or similar legislation by any government.
(3) Federal old age insurance benefits payable under 42 U.S.C.A. § 401, Railroad Retirement Act benefits payable under 45 U.S.C.A. § 228 or § 231 or any retired or retainer pay of a member or former member of a uniformed service computed under 10 U.S.C.A. § 1401.
(4) Payments commonly known as public assistance or unemployment compensation by a government agency.
(5) Payments made by employers to employes to reimburse actual expenses allowable as an ordinary, reasonable and necessary business expense.
(6) Payments made by an employer or labor union or elective contributions deemed to be made by an employer under a cafeteria plan for a nondiscriminatory health, accident or death plan.
Example:
P is a partnership that is engaged in providing accounting services. On a nondiscriminatory basis, it offers the following fringe benefits to both employes and partners of the firm:
Blue Cross/Blue Shield medical coverage.
Dental and eyeglass coverage with a deductible.
Group term life insurance with coverage up to the equivalent of the employe’s annual salary.
P pays the premiums on behalf of all employes and partners for all medical, dental, eyeglass and insurance coverage directly to the insurance carrier or benefit provider. P does not add the premium costs for the benefits to any employe’s gross wages and it accounts for the benefit costs as nonsalary fringe benefit expenses. In other words, the value of the benefits are not shown as an addition to any employe’s wages on the paystubs furnished to employes.
The plan is not a Federally qualifying cafeteria plan.
Conclusion: For the employes of P the employer-provided hospitalization (Blue Cross/Blue Shield), eyeglass, dental coverage and group life insurance benefits are excludable from compensation and are therefore not subject to withholding. The premiums paid on behalf of the partners, however, are not deductible or excludable from the income of the partnership or the partners.
(7) The value of meals and lodging furnished for the convenience of an employer or casual employer does not constitute compensation. Payments made to an Individual Retirement Account, as provided by the Employee Retirement Income Security Act of 1974 (ERISA), the act of September 2, 1974 (Pub. L. No. 93-406, 88 Stat. 829), are not excludable in computing income which is subject to tax under this article.
(8) Old Age or Retirement Benefit Plans.
(i) Scope. For the purpose of this section, the term plan includes Individual Retirement plans (IRA), Simplified Employee Pension Plans (SEP), Keogh plans, Federally qualified employe pension plans and similar old age or retirement benefit plans.
(ii) Contributions.
(A) Contributions to a plan made by employers or labor unions on behalf of an employe are excludable from the employe’s income, except as otherwise provided in this chapter.
(B) Contributions to a plan made by an employe or other individual directly or indirectly, whether through payroll deduction, a salary reduction agreement or otherwise, are not excludable from his income. Contributions by, on behalf of or attributable to a self-employed person are not excludable from either compensation or net profits from a business, profession or other activity.
(iii) Distributions.
(A) Amounts distributed to an individual from a plan shall be included in income to the extent that contributions were not previously included in this income except for either of the following:
(I) Distributions made upon or after his retirement from service after reaching a specific age or after a stated period of employment.
(II) Distributions transferred into another plan, where the transferred amounts are not included in income for Federal income tax purposes.
(B) To determine the portion of a distribution to be included in income, an individual shall use the cost recovery method.
Example 1:
John contributed $1,000 to his IRA. He pays tax on the $1,000 contribution. Three years later the account has earned $750 in income. The total balance of the account at that time is ($1,000 + $750 =) $1,750. John receives a distribution of $750 from his IRA. Since the amount of the distribution does not exceed $1,000, the distribution is not includable in income.
Example 2:
Same facts as Example 1, except that John receives a distribution of $1,500. Since the amount of the distribution exceeds $1,000, the excess of the distribution, $500, is includable in his income, as compensation.
(iv) Income on plan assets. Income on assets held in a plan is not includable in income.
(9) Payments made by an employer or labor union for a nondiscriminatory supplemental unemployment benefit or strike benefit plan.
(10) Federally excludable benefits provided for the convenience of the employer.
(11) Fringe benefits described in § 101.6a (relating to fringe benefits in the form of personal use of property or services).
(12) Program benefits payable on condition of hospitalization, sickness, disability or death under a health, accident or death plan.
(13) Guaranteed payments to a partner for services rendered to the partnership.
(14) Benefits payable by an employer or labor union under a supplemental unemployment benefit plan, whether payable on a periodic basis or in the form of cash, services or property.
(d) The Department may require the submission of a statement from an employer or casual employer with respect to its employes or casual employes regarding the verification or substantiation of unreimbursed and reimbursed business expenses. The statement of the employer or casual employer should verify that the expenses were required by the employer or casual employer. The statement shall set forth the types of expenses such as travel, meals, hotel and so forth that the employer or casual employer specifically requires the employe or casual employe to incur and to what extent, if any, the expenses are reimbursed. If the employer or casual employer requires the employe or casual employe to maintain an office, or office-in-home, a statement by the employer or casual employer to this effect should also be included. The Department does not require the employer or casual employer to specifically list the amount expended or to verify each expense incurred by the employe or casual employe.
(e) Compensation paid in a medium other than cash shall be valued at its current market value. Compensation paid in the form of employer-provided coverage under an employe welfare benefit plan shall be valued at cost. The cost shall be the total amount of payment made during the year by the employer on account of the plan and plan participant, except in the following situations:
(1) In the case of self-insured insurance plans, the cost shall be the annual cost for financial accounting purposes.
(2) The amount of compensation paid in the form of Federally taxable noncash fringe benefits shall be determined in the same manner as is prescribed by the Internal Revenue Service under Federal statutes and regulations.
(3) In the case of cafeteria plans, amounts specified in the plan document as being available to the participant for the purpose of selecting or purchasing benefits, when so used, shall be included in the total amount of payment made during the year by the employer on account of the plan and plan participant.
(f) Compensation in the form of incentive, qualified, restricted or nonqualified stock options shall be considered to be received:
(1) When the option is exercised if the stock subject to the option is free from any restrictions having a significant effect on its market value.
(2) When the restrictions lapse if the stock subject to the option is subject to restrictions having a significant effect on its market value.
(3) When exchanged, sold or otherwise converted into cash or other property.
(g) The following rules apply if, under a cafeteria plan, plan participants may choose between benefits consisting of cash, additional paid vacation days, and other benefits; or if, outside a cafeteria plan, plan participants can purchase additional paid vacation days:
(1) If additional paid vacation days are elected or purchased and they are used before the next calendar year, the following apply:
(i) The amount of cash foregone in exchange for the paid vacation day is excluded from income.
(ii) The vacation pay is includable in income when paid.
(2) If additional paid vacation days are purchased outside a cafeteria plan and they are not used before the next calendar year, the amount of cash foregone in exchange for the paid vacation days is excludable for Pennsylvania Personal Income Tax purposes only if both of the following apply:
(i) The value of the vacation day cannot be cashed out or used for any other purpose.
(ii) The vacation day cannot be carried over to the next taxable year.
(h) Employer payments to reimburse employes for uninsured medical or dental expenses are taxable as compensation if the employe is assured of receiving (in cash or any other benefit) amounts available but unused for covered reimbursement during the year without regard to whether the employe incurred covered expenses or not. If the amounts available for covered reimbursement cannot be cashed out or used for any other purpose during the taxable year or be carried over to any other taxable year, normal cash compensation that is forgone by an employe under a spending account or otherwise, and credited to a self-insured medical reimbursement account and drawn upon to reimburse the employe for uninsured medical or dental expenses to which section 105(b) of the IRC (26 U.S.C.A. § 105(b)) applies is excludable from tax.
(i) After December 31, 1996:
(1) Payments made after December 31, 1996, for employe welfare benefit plans under a cafeteria plan will be deemed to be an “employer contribution” for Pennsylvania Personal Income Tax purposes if the following apply:
(i) The payments were not actually or constructively received, after taking section 125 of the IRC (26 U.S.C.A. § 125) into account.
(ii) The payments were specified in a written cafeteria plan document as being available to the participant:
(A) For the purpose of selecting or purchasing benefits under a plan.
(B) As additional cash remuneration received in lieu of coverage under a plan.
(iii) The benefits selected or purchased are nontaxable under the IRC when offered under a cafeteria plan.
(iv) The payments made for the plan would be nontaxable under the Pennsylvania Personal Income Tax if made by the employer outside a cafeteria plan.
(2) If the requirements of paragraph (1) are satisfied, cafeteria plan contributions are taxed under such rules as they apply to employer payments for employe welfare benefit plans. However, if the benefits are taxable for Federal Income Tax purposes when offered under a cafeteria plan, the payments will also constitute compensation for Pennsylvania Personal Income Tax purposes. Payments also will constitute compensation if they would be taxable under the Pennsylvania Personal Income Tax if made by the employer outside a cafeteria plan. For example, although not taxable under the IRC, coverage under a dependent care plan providing for the reimbursement of expenses for household or dependent care services would constitute compensation under the Pennsylvania Personal Income Tax because it would be taxable if made by an employer outside a cafeteria plan.
(j) Compensation includes the entire cost of employer-provided coverage provided to a highly compensated participant under any discriminatory employe welfare benefit plan.
(k) Contributions made by an employer for IRC 401(k) plans under a cafeteria plan under which the employe unilaterally may elect to have the employer either make the payments as contributions to a 401(k) plan or other plan on behalf of the employe or to the employe directly in cash are not excludable from the employe’s compensation.
(l) Except as provided in § 101.6a (relating to fringe benefits in the form of use of property or services), compensation is taxable regardless of the form of the payment. Examples of taxable forms of payment include:
(1) Cash.
(2) Foreign currency.
(3) A check or other negotiable instrument.
(4) Freely transferable, readily marketable obligations or other cash equivalent.
(5) Tangible property interests, intangible personal property or other rights, claims or things that either:
(i) Can be enforced in courts of equity and transferred and have an ascertainable fair market value.
(ii) Can be reduced to cash or eliminate an expenditure.
(6) A monetary payment in reimbursement of a personal expenditure or to eliminate a personal expenditure.
(7) Below-market rate loans.
(8) A cancellation of indebtedness constituting a quid pro quo or incentive that would be taxable had the amount by which the debt had been forgiven or discharged instead been paid to the debtor in cash or property.
(m) For purposes of this section:
(1) A person who separated from service before satisfying superannuation requirements shall be deemed to be retired from service upon reaching retirement age, regardless of whether he has permanently and wholly withdrawn from active working life or not.
(2) The voluntary discontinuance of a plan within 3 years after it has taken effect, for any reason other than business necessity, will be evidence that the plan was temporary and limited.
Authority The provisions of this § 101.6 amended under section 354 of the Tax Reform Code of 1971 (72 P. S. § 7354).
Source The provisions of this § 101.6 adopted February 19, 1972, effective February 20, 1972, 2 Pa.B. 259; amended March 13, 1976, effective March 14, 1976, 6 Pa.B. 454; amended April 8, 1978, effective April 9, 1978, 8 Pa.B. 1055; amended through April 13, 1984, effective April 14, 1984, 14 Pa.B. 1308; amended May 15, 1992, effective May 16, 1992, 22 Pa.B. 2541; amended December 10, 1999, effective December 11, 1999, 29 Pa.B. 6249; amended August 4, 2000, effective August 5, 2000, 30 Pa.B. 3938; amended January 11, 2002, effective January 12, 2002, 32 Pa.B. 250, 253. Immediately preceding text appears at serial pages (268457) to (268467).
Notes of Decisions Actual Expenses
Transferred employees reimbursement for expenses incurred in purchasing new residence are compensation and reportable as taxable income. Williamson v. Commonwealth, 525 A.2d 475 (Pa. Cmwlth. 1987).
Court rejected taxpayers request to interpret term ‘‘actual expenses’’ to mean ‘‘any’’ expenses including living expenses; rather, Department’s interpretation of term as limited to business expenses is consistent with legislative intent and previous rulings of Pa. Supreme Court. Williamson v. Commonwealth, 525 A.2d 475 (Pa. Cmwlth. 1987).
Constitutional
Retirement contributions made on behalf of partners is money that the partners would otherwise receive in their share of the net profits of the partnership, and the contributions are made, at least theoretically, at the election of the partners. On the other hand, when an employer makes contributions to an employee’s retirement plan, the contributions are not made by reducing the employee’s salary, and the employee is given no control over whether the contributions are to be made. Furthermore, the employee does not actually or constructively receive the contributions because the receipt of benefits under the retirement plan could be subject to substantial limitations and restrictions. There is, therefore, a legitimate and nonarbitrary reason for distinguishing between partners and employees, thus rendering the Department of Revenue’s regulations constitutional. Smith v. Commonwealth, 684 A.2d 647 (Pa. Cmwlth. 1996).
Contributions
The provisions of subsection (c)(8)(ii) violate the Uniformity Clause of the Pennsylvania Constitution (Article VIII, section 1) insofar as they permit employees who are similar to independent contractors to exclude unreimbursed business expenses from taxable income while denying an exclusion for such expenses to employees who are not similar to independent contractors. Ritz v. Commonwealth, 432 A.2d 169 (Pa. 1981).
Federal Treatment
Just because the Internal Revenue Code and certain Pennsylvania statutes treat rollover contributions differently from other contributions, did not mean that Pennsylvania courts would also treat them differently when interpreting 42 Pa.C.S. § 8124. Thus, debtor’s claimed exemption for an IRA is denied to the extent of $56,134.75, such amount representing the difference between the $71,134.75 debtor contributed to the IRA in 1992 and the $15,000 yearly exemption limitation under Pennsylvania law. In re Barshak, 185 Bankr. 210 (Bankr. E. D. Pa. 1995); reversed 106 F.3d 501 (3rd Cir. 1997).
An employer must withhold personal income tax from contributions to an employee’s savings plan under a salary reduction plan and Federal law is inapplicable. AMP Products Corp. v. Commonwealth, 593 A.2d 1 (Pa. Cmwlth. 1991); affirmed 608 A.2d 25 (Pa. Cmwlth. 1990).
Partnerships
Co-owners of a law firm, organized as a partnership, assume the status of self-employed individuals. Smith v. Commonwealth, 684 A.2d 647 (Pa. Cmwlth. 1996).
Post Termination Income
A post-termination ‘‘Special Incentive Compensation Plan,’’ involving payment of dividend units was compensation and not old-age or retirement payments. Bickford v. Commonwealth, 533 A.2d 822 (Pa. Cmwlth. 1987).
If a distribution to a taxpayer from an employer-sponsored profit sharing trust constitutes payment for services rendered and is a severance rather than a retirement benefit, it is compensation. Gosewisch v. Department of Revenue, 397 A.2d 1288 (Pa. Cmwlth. 1979).
Rollover Contributions
The Legislature’s failure to specifically address the rollover problem does not demonstrate an intent to exclude rolled-over funds from the protection of 42 Pa.C.S.A. § 8124, particularly since such an intent would be in conflict with the Legislature’s other purposes in enacting the statute. In re Barshak, 195 Bankr. 321 (E. D. Pa. 1996).
Self Employed
The provision that states that contributions to an IRA by a self-employed individual for the individual’s own benefit are not ordinary business expenses and cannot be excluded from net profits is reasonable. Kalodner v. Commonwealth, 615 A.2d 900 (Pa. Cmwlth. 1992); adhered to on reconsideration 636 A.2d 1230 (Pa. Cmwlth. 1994); affirmed by 675 A.2d 710 (Pa. 1995).
Union Dues
Union dues should be permitted to be excluded from income if union membership is mandated by the contract between the union and the employer. Ritz v. Commonwealth, 432 A.2d 169 (Pa. Cmwlth. 1981).
Cross References This section cited in 61 Pa. Code § 103.11 (relating to compensation).
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