With another year-end just around the corner businesses need to think about work-related and fringe benefits that are provided to employees. Many of these work-related and fringe benefits need to be added to compensation of the employee and reported on the W-2. Some are subject to all taxes while some are exempt from certain taxes.
What are Fringe Benefits and How are they Reported?
Some examples of common benefits are: employer provided cars, employer provided health insurance, Group Term life insurance, memberships to country club or other social clubs, tickets to entertainment or sporting events, discounts on property or services.
The employer’s cost of providing a taxable, non-cash benefit is not necessarily the appropriate measure of the compensation amount to add to the employees’ W-2. Instead, it is the fair market value of the benefit that is the taxable amount. In some instances, the fair value is determined by a rule or table of values. These can be referred to as mandatory valuation methods. For example, the IRS prescribes a mandatory valuation method for valuing the taxable portion of premium payments for group-term life insurance coverage exceeding $50,000.
Small Fringe Benefits
Sometimes, benefits may be so small or infrequent that they do not need to be included in an employees’ compensation. These are called de-minimus fringe benefits and trying to account for them would be unreasonable or administratively impossible-such as snacks, holiday gifts, and occasional tickets for theater or sporting events. This does not include cash or gift cards no matter how small in amount.
Working Condition Fringe Benefits
There are also working condition fringe benefits. These are benefits provided to an employee to allow them to perform their job. The cost of the property or service must be deductible as a business expense or depreciation expense if the employee had paid for it as a business expense themselves. Employees’ must meet substantiation requirements.
The most common working condition benefit is the employer provided vehicle. The value of the personal use of the company owned vehicle should be added to the employee’s compensation before year end. For any vehicle valued at more than $15,900 (when first placed into service) we use the lease value for calculating this fringe benefit. This lease value is found by looking up the fair market value of the vehicle in the IRS table, then multiplying by that value by the percentage personal use. As with all working condition benefits employees are required to substantiate their business use and that substantiate must be in writing. The business use of the vehicle is exempt. The personal use is considered a fringe benefit and is subject to all taxes.
Employer Provided Health and Dental Coverage Fringe Benefits
Another very common fringe benefit is employer provided health or dental coverage. For non-owner employees this fringe benefit is not taxable in most cases. Partners and more than 2% owners of S-corporations are not treated as employees for this fringe benefit. The company paid health benefits must be added to the S-corporation owners’ compensation or to the Partners’ Guaranteed Payments. This benefit is subject to federal and state withholding, it is exempt from social security, Medicare and Federal Unemployment taxes. (There are special rules for highly compensated employees in a self-insured plan.)
There are special rules for life insurance benefits provided to employees depending on how many employees you have, who pays the premiums and who is the beneficiary of the plan.
How DHJJ Can Help
For a discussion of these and many other fringe benefits, please contact DHJJ at 630-420-1360, or through the form below.