- FREE 9+ Sample Employee Loan Agreements in PDF | MS Word
- sample letter of agreement between employer and employee
- Warning: Employee Loans Could Have Adverse Tax Consequences
- Free Printable Employee Loan Agreement
FREE 9+ Sample Employee Loan Agreements in PDF | MS WordCompanies intending to provide financial assistance to their employees through employer loans must carefully navigate and structure these loans in compliance with the applicable tax requirements. The failure to comply with the relevant tax rules may cause a transaction intended by the parties to constitute a true loan to instead trigger taxable income to the employee as disguised compensation. Companies often include employee loans in their executive compensation packages. Since the advent of Sarbanes-Oxley, public companies have been precluded from entering into loan transactions with their executive officers and directors. A private company considering a loan to its employee should carefully consider the various tax requirements and consequences in structuring the arrangement. Under certain circumstances, the IRS may view a purported employer-employee loan transaction as a taxable compensatory advance or as providing taxable deferred compensation. Therefore, it is critical to take all steps possible to preclude the loan from appearing to be compensatory. The interest rate under the loan, the loan documentation, the means by which the loan principal is to be repaid, the collateral for the loan, the potential or contractual forgiveness of the loan, and even the specific use of the loaned funds can each play a pivotal role in the success or failure of the contemplated loan transaction for tax purposes. When an employer loans funds to an employee using appropriate loan documents that provide for "monetary repayment" of the loan as contrasted to repayment via the provision of servicesa sufficient rate of interest, and that have the characteristics of an arm's-length loan, the transaction should be respected as a loan by the IRS. Interest Rate - Appropriate interest must be charged to the employee under an employer-employee loan. Different AFRs apply posted monthly by the IRS to short-term loans 3 years or lessmid-term loans greater than 3 years but less than 9 yearslong-term loans greater than 9 yearsand demand loans. Where the interest rate under the loan is less than the required AFR commonly referred to as a "below-market loan"the difference between the interest that would have been paid using the applicable AFR and the interest at the rate actually used will constitute taxable compensation income to the employee. If the loan is a term loan, the amount of the foregone interest is considered to be transferred to the employee as of the date of the loan, with the result that the employee's taxable compensation would increase as of the date on which the loan is made. Where the loan is a demand loan, the foregone interest is calculated separately for each year, and each year's taxable compensation amount increases as of December Bona Fide Loan s - Properly documenting the factors identified by the IRS as indicative of a true loan is perhaps the most critical aspect of structuring a tax-effective employer-employee loan transaction. In this regard, the IRS takes the position that the following factors are indicative of a bona fide loan:. Forgivable Loans - While an employer loan is generally intended to provide financial assistance to the employee, forgivable loans are often used as a compensation technique to provide an employee with upfront cash. Depending upon the existence or lack of the bona fide loan factors, forgivable loans may or may not be recognized as true loans for tax purposes. Forgivable loan arrangements typically provide for the employee's repayment obligation to be contingent upon his or her continued employment with the employer. The intent is for the employee to have no tax consequences upon receipt of the loan proceeds, and subsequently to realize taxable compensation income only as and to the extent the loan is forgiven. The most common structure is for the employer to forgive a uniform percentage of the loan amount on an annual basis e. If the above bona fide loan factors are present and adequately documented, a forgivable loan should be treated as a loan for tax purposes. The above-referred true loans differ from employer-employee "loans" where the repayment obligation is contingent rather than unconditional. Under such an arrangement e. Given this, the receipt by the employee of the "loan" proceeds may constitute taxable compensation income. Another approach often used is where, despite bona fide loan formalities being in place, the employer and the employee also enter into a bonus arrangement at the time of the loan. Under this scenario, the employee will earn annual bonuses for the period the loan is in effect, with each annual bonus equal in amount to the employee's annual loan repayment obligation. The parties agree that, rather than paying the bonus amounts to the employee, the employer will use those amounts to satisfy the employee's repayment obligations under the loan. Thus, the employee would only be required to make "monetary" repayment of the loan if his or her employment is terminated under certain circumstances. The IRS has challenged these types of arrangements and treated the loan proceeds as compensatory cash advances. In these cases, the IRS has argued that the income stream created by the bonus results in the employee not having the required personal liability to repay the loan, the circular flow of funds between the parties lacks a business purpose and economic substance, the agreement is motivated solely by tax avoidance considerations and because "monetary" repayment of the loan is only required upon termination of employment, the loan agreement operates more as contractual liquidated damages than as a feature of a bona fide loan repayment. Non-Recourse Loans to Purchase Employer Stock - An employer may offer an employee the opportunity to purchase shares of the employer's stock and lend the purchase price for the shares to the employee in return for the employee's promise of repayment, with interest, over a specified time. Dramatically different tax consequences will result if, under the terms of the loan, the employee has no personal liability and, instead, repayment of the loan is secured solely by the employee's pledge of the shares being purchased.
sample letter of agreement between employer and employee
The loan agreement supplied here is specifically tailored for employees. For a variety of other loan agreements, please refer to our page on Promissory Notes. An employee acknowledgement of debt should be signed to serve as proof that money is owed and to grant permission to the employer to deduct payments from the salary. Unlike a Promissory Note, where the borrower is in control of making repayments, the employer can control repayments of a staff loan. It is therefore important for the employer to get written authorization to deduct money from a salary. Without a written agreement in place, you may be sued for damages should you withhold salary payment from an employee. You should specify the reason for deduction such as a cash loan or advance against a salary or stock purchases made from the company etc. Note: you do not need written authorization for statutory deductions such as employees tax. Note: Visit our Employment main page for links to all the relevant free legal forms for the work place and their related guidelines. The employee loan or debt agreement below also makes provision for the full amount to be deducted should the employee resign. However, this may be seen as an accellaration of debt repayment i. The employer would therefore be wise not to extend loans greater than the weekly or monthly salary. A more extensive agreement should be drawn up for longer term or large loans, which can endure beyond the term of employment. Your labor laws may also limit deductions to a percentage of gross remuneration, so check with your local laws before extending credit. Usury law will also determine the amount of interest that may be charged. Please refer to our guidelines on promissory notes for more information on interest rates and interest free loans. Making loans to employees to aquire shares in a company qualifies as a benefit to the employee and may be taxable. You need to consult with your financial advisor or company auditor on the best way to structure this type of loan. Does this site deserve your thumbs up? Let's hear your verdict about what you've read here!
Warning: Employee Loans Could Have Adverse Tax Consequences
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In the midst of a struggling economy, firms understand the importance of finding and retaining top talent. To recruit and preserve such valuable resources, numerous firms have turned to offering traditional and compensation-related employee loans. Whether such loans are constructed for retention or to administer employee aid, their tax treatment should be closely considered. A traditional employee loan adheres to the strict definition of a loan and does not require the recognition of compensation by the employee. Below-market and employee forgivable loans represent two types of compensation-related employee loans. With a below-market loan, the employee must recognize compensation for the difference between the loan's stated rate of interest and the higher market rate of interest. With an employee forgivable loan, companies typically forgive the employee of their interest and principal repayment obligation over time. Therefore, the interest and principal amounts are captured as compensation income to the employee. Each of these employee loans provides different benefits to employees and needs to be carefully structured in order to provide the desired income recognition and tax treatment for both the employee and employer. SOX made it unlawful for an issuer to extend or maintain credit in the form of a personal loan to a director or executive officer. Therefore, public companies subject to SOX should avoid offering employee loans to directors or executive officers; however, employee loans can still be offered to other rank and file employees. Non-public companies not subject to SOX can extend employee loans to employees of all levels. Traditional Employee Loans A traditional employee loan is commonly used to administer financial assistance to an employee, whereby an employer lends money to an employee with the full intention that the employee will repay the loan to the employer plus interest. The guidelines for administering a traditional employee loan hinge on the legal obligation of the employee to make monetary repayment of the advance, as well as the employer's intention to impose repayment. To confirm these obligations, both parties must sign a loan document stating the provisions for repayment, the fixed maturity dates and the appropriate stated interest. The stated interest rate must be at least the Applicable Federal Rate AFR in effect as of the day on which the loan was made, compounded semiannually. Cash repayments are to be made in a timely manner and must be unconditional and not contingent upon future events. If a traditional employee loan is administered properly, the employee does not recognize compensation income and the employer will not receive a compensation expense deduction for the loaned amount. Below-Market Loans Below-market loans are provided to employees at a lower interest rate then they could otherwise receive in the market. Below-market loans can be offered at either a reduced interest rate below the AFR or completely interest free, as an original issue discount. The spread between the reduced interest rate and the market rate of interest the AFR is recognized as compensation to the employee and deducted as compensation expense by the employer. The timing of the recognition of compensation depends on whether the loan is a demand loan or a term loan. For a demand loan, the amount of forgone interest is recognized as taxable compensation to the employee and as a compensation expense deduction to the employer on the last day of the calendar year. If a term loan is provided to an employee who leaves the company prior to repaying the loan, the employee must continue to make repayments of the loan, even after he or she is no longer employed, according to the original repayment schedule. For a term loan, the amount of forgone interest is transferred at the time the loan is made and is equal to the excess of the amount loaned over the present value of all payments that are required to be made under the terms of the loan agreement. Therefore, term loans are treated as original issue discount loans. The employee will recognize taxable compensation and the employer will recognize compensation expense on the date the loan is made. Employee Forgivable Loans A popular tool used to attract top talent is the employee forgivable loan. Employers often issue these loans as sign-on or retention bonuses to retain and attract top executives.