Those of us who do not own companies have a tendency to think that offering employees fringe benefits is as simple as making the choice to do so. It is not. Fringe benefits complicate both payroll and benefits administration considerably. A complex benefits package is often enough motivation to outsource payroll to a company such as BenefitMall.
According to BenefitMall, much of the complexity has to do with taxation. Some benefits are subject to Social Security, Medicare, and federal unemployment tax. Others are subject just to Social Security and Medicare. Still others are not taxed at all.
A company not offering fringe benefits probably finds payroll fairly simple. The minute you start offering benefits though, payroll suddenly becomes much more complex. The more benefits offered, the more valuable the services of a third-party payroll provider become.
Reporting and Paying Taxes
Taxable benefits are treated a lot like regular income for the purposes of IRS reporting. The general rule is as follows: employers determine the actual value of any non-cash benefits paid the previous year, prior to filing tax forms by January 31. If they paid too little in the previous year, they have to make up the difference.
Taxes due for the current year are reported and paid the same way income tax and FICA are paid. Employers can choose when they want to report, as follows: annually, semiannually, quarterly, with every payroll run, or another schedule they feel is best for them. Employers can also change their schedule as needed. However, payments cannot be made randomly. Employers must schedule when payments will be made and then stick to that schedule.
Examples of Taxable Benefits
Attempting to list every taxable fringe benefit would be a futile exercise due to the fact that the IRS considers a fringe benefit taxable “unless the law specifically excludes it.” In other words, employers must assume a fringe benefit is taxable right from the start. Then they check IRS documentation to see if that particular benefit is on the excluded list.
Here are just a few examples of taxable benefits:
- Mileage Reimbursements – When employees are reimbursed for business use of their personal vehicles, any reimbursement for miles that exceed standard IRS mileage rates becomes taxable.
- Commuter Benefits – Prior to 2018, employers could encourage their workers to commute by bike via an allowance of up to $20 per month. The allowance was tax-free, but it is not anymore.
- Clothing Benefit – Employees who provide clothing suitable for street wear must report the value of that clothing as taxable. Company uniforms not suitable as street wear are not considered a taxable fringe benefit.
There are many other taxable benefits that have not been mentioned in this list. The key to remember is that different taxable benefits are subject to different kinds of taxation.
Examples of Nontaxable Benefits
Fringe benefits under the nontaxable category are more easy to identify for the simple fact that there are fewer of them. At the top of the list is health insurance coverage. Health insurance benefits, up to a certain value, are tax-free. Only the most expensive health insurance policies are valued high enough to incur taxes.
Other examples of nontaxable benefits include the following:
- Stock options
- Health Savings Account contributions
- Dependent care assistance
- Group term life insurance, up to a certain value.
There are others we could add to this list as well. The most important thing to remember is that employees are ultimately responsible for knowing whether or not their benefits are taxable. Any that are must be reported and taxes paid on time.