Payroll in Practice: 4.4.2022

Question: The sole owner of limited liability company that has elected to be treated as a Subchapter S corporation for federal tax purposes is paid on a salary basis and otherwise meets the requirements to be exempt from the Fair Labor Standards Act minimum wage and overtime compensation requirements under the executive exemption. However, the owner is paid a weekly salary that is less than the $684 weekly salary requirement for the exemption. Does the owner qualify as exempt under the FLSA executive exemption?

Answer: Certain business owners may still qualify for the executive exemption from the minimum wage and overtime requirements without meeting the salary requirement that usually applies for the exemption. State law requirements may vary from the FLSA.

Under Title 29 of the Code of Federal Regulations, Section 541.100, the executive exemption requires that the employee be compensated on a salary basis at a rate that is at least $684 a week exclusive of board, lodging, or other facilities provided by the employer.

To qualify for the executive exemption, the employee must also:

• be primarily responsible for managing the enterprise or a customarily recognized department or subdivision of the enterprise;
• customarily and regularly direct the work of two or more other employees; and
• have the authority to hire or fire other employees or provide suggestions and recommendations that are given particular weight regarding the hiring, firing, advancement, promotion, or any other change of status of other employees.

Section 541.101 provides an exception to the general rule for business owners. Under that rule, an employee is employed in an executive role if the employee owns at least a 20% equity interest in the enterprise and is actively engaged in its management.

Management is defined in Section 541.102, which describes more than a dozen responsibilities commonly associated with supervising employees, controlling workflow, and maintaining legal compliance. Section 541.101 states that the salary basis and amount requirements for the executive exemption do not apply to business owners who meet the requirements for ownership and active engagement in management.

Question: An employer plans to reimburse interview expenses, such has travel, for job candidates. Are such reimbursements reported on a Form 1099 or Form W-2?

Answer: Generally, reimbursed interview expenses for job candidates are not reported on either a W-2, Wage and Tax Statement, or any form in the 1099 series.

The reimbursements are not reported on Form W-2, because the payments do not meet the definition of wages. Job candidates are not employees at the time of the interview, even if they are hired later.

Revenue Ruling 63-77 states:
“Allowances or reimbursements made to individuals by a prospective employer for expenses incurred in connection with interviews for possible employment, which are conducted at the invitation of the prospective employer, are not ’wages’ subject to Federal employment taxes and the withholding of income tax. Also, to the extent they do not exceed the expenses incurred, they are, under the circumstances, not includible in the gross income of such individuals for Federal income tax purposes.”

The discussion in Chief Counsel Memorandum AM2010-006 also provides relevant guidance:
“…a taxpayer does not have gross income when it pays the expenses of another person and receives a reimbursement of its payments. Expenditures of this nature are analogous to loans in which the taxpayer is the lender and the party for whom the expense is paid (and who reimburses the taxpayer for paying the expense) is a borrower…the payments are not taxable events any more than a loan, or the corresponding repayment of the principal of a loan, are taxable events. These payments are not accessions to the wealth of the taxpayer and thus not includible in the taxpayer’s gross income.”

The reimbursements are also not compensation for services in the sense of nonemployee compensation, are not subject to self-employment tax, and are not reportable on Form 1099-NEC, Nonemployee Compensation.

For the job candidate, any reimbursement is excluded from gross income to the extent the reimbursement does not exceed actual expenses. The rules do not require that the candidate must otherwise be able to deduct the expenses as job-hunting expenses.

Instead, the employer shifts the financial burden from the job candidate to itself. By reimbursing the costs, the applicant’s job-hunting expenses become the employer’s ordinary and necessary business expenses.

If the reimbursement exceeds the costs incurred by the candidate, the candidate should report the excess reimbursement as other income. If the employer knows the reimbursement exceeds the incurred costs, the employer could report the excess reimbursement on Form 1099-MISC, in Box 3, Other Income.

However, it is possible that the employer would not know there was excess reimbursement. For example, a job candidate might make one trip to interview with two prospective employers and receive a per diem allowance from each employer covering the same travel expenses.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, N.C., and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

Do you have a question for Payroll in Practice? Send it to phaggerty@prodigy.net.