Employers Have Specific Responsibilities Related To Fringe Benefits
These days there are so many tax changes to keep track of … the last thing you probably need is for us to call attention to another one. But, alas, here we are …
On today’s menu, we’re serving up a nice helping on the topic of fringe benefits.
When it comes to employee compensation, you can deploy a few different methods – wages, employee discounts and fringe benefits are all examples of forms of payment that’s provided in exchange for services. But, like other forms of payment, there are rules by which you must abide.
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Don’t Forget To Give The Government Its Cut
Just like your employee’s regular wages, every fringe benefit you deliver is taxable, which means you must include it in the recipient’s gross pay – that is, unless the law specifically excludes it. This is the gray area where most employer’s get tripped up. Fringe benefits have exclusion rules that apply and, if you’re not careful, you might catch the attention of the IRS. Determining the value of these benefits and how much can be excluded when it comes to filling out your tax documents takes more effort than you think. Reach out to your tax advisor for assistance.
Employee Discounts
Over the years, I’ve seen more than a few business owners get tripped up by the regulations surrounding employee discounts and wages. This particular exclusion applies to the discounted price your employees receive on the goods and services your business already offers to customers. The guidance you’ll want to follow is detailed below.
- Exclusion From Wages – You can usually exclude the total value of the employee’s discount from their wages up to the limits listed below.
- For a discount on services, 20% of the price you charge nonemployee customers for the service.
- For a discount on merchandise or other property, your gross profit percentage multiplied by the price you charge a nonemployee for the property.
- Finding The Value – As the employer, it is your responsibility to calculate the value of the fringe benefits that are provided to your employees. Generally speaking, the value is equal to its fair market value (FMV). To find the FMV, you will have to determine the amount an employee would have to pay an outside source to buy or lease the same goods and/or services you are providing as a fringe benefit. Additionally, you’ll have to take into account specific facts and circumstances related to your particular situation to figure out the final value.
Withholding, Depositing and Reporting
For employment tax and withholding purposes, you can treat noncash fringe benefits as being paid on a pay period, quarter, semiannual, annual, or other basis. That being said, the benefits must be treated as being paid no less frequently than annually. You are also not required to choose the same period for all employees. Furthermore, you may change the period as often as you like as long as you treat all the benefits that were provided during the calendar year as paid no later than Dec. 31 of the calendar year.
When it comes to employee discounts and wages, you are allowed to add the value of the fringe benefit to an employee’s regular wages for a payroll period and determine income tax withholding on the total. Another route you can take is withholding the federal income tax on the value of fringe benefits at the flat 25 percent rate that applies to supplemental wages. That being said, you are required to withhold the social security, income and Medicare taxes for the time period during which the benefits were paid.
When the time comes to report your employee’s compensation, you’ll have to record the actual value on Forms 941 and W-2. You’ll want to include the true value of the fringe benefits in box 1 of Form W-2, or in boxes 3 and 5, if necessary. If the recipient of a taxable fringe benefit is your employee, the benefit is subject to employment taxes and must be reported on Form W-2. If the recipient of a taxable fringe benefit is not your employee, the benefit is not subject to employment taxes. However, you may have to report the benefit on Form 1099-Misc if they are an independent contractor or Form 1065 if they are a partner.
Do you have additional questions related to fringe benefits? We can help. Email Rea & Associates to get in touch with one of experienced tax pros.
By Peggy Minnig, CPA (Lima office)