Let’s talk Fringe Benefits

Fringe benefits are benefits provided by employers as compensation outside of an employee’s wages. Some employers provide certain benefits as an incentive to retain existing employees or onboard new ones. While some benefits, such as, a delivery person’s personal use of the company van, are incidental to an individual’s employment.  Additionally, some benefits are de minimis and are covered under on Internal Revenue Code section 132(a)(4). The Code requires such de minimis fringe benefits be excluded if they are infrequently used and are of inconsequential value. De minimis benefits not included in the Code may include, but not limited to the following:

• ·       Personal use of business cell phone,
• ·       Holiday gifts, employee use of photocopier and,
• ·       Group term life insurance with face value up to $2,000.

Fringe benefits.

Fringe benefits must be included as part of an employee's wages unless they are otherwise nontaxable. Such benefits are subject to income tax withholding and employment taxes (FICA). Reportable fringe benefits may include cars and airplane rides provided by employers, free or discounted commercial flights and vacations, to name a few, that must be included in employee wages. An employer determines the reportable amount by determining the excess of the amount paid by the employee over the fair market value of the benefit plus any amount the law excludes. There are other special rules you and your employees may use to value certain fringe benefits.

Nontaxable fringe benefits.

Some fringe benefits aren't taxable (or are minimally taxable) if certain conditions are met. The following are some examples of nontaxable fringe benefits.

• ·       Services provided to your employees at no additional cost to you.
• ·       Qualified employee discounts.
• ·       Working condition fringes that are property or services that would be allowable as a business expense or depreciation expense deduction to the employee if he or she had paid for them. Examples include a company car for business use and subscriptions to business magazines.
• ·       Certain minimal value fringes (including an occasional cab ride when an employee must work overtime and meals you provide at eating places you run for your employees if the meals aren't furnished at below cost).

However, the benefits of highly compensated employees must be included in wages unless the benefit is available to other employees on a nondiscriminatory basis.

• ·       No-additional-cost services.
• ·       Qualified employee discounts.
• ·       Meals provided at an employer-operated eating facility.
• ·       Reduced tuition for education.

Note: a highly compensated employee for 2020 is an employee who meets either of the following tests.

• ·       The employee was a 5% owner at any time during the year or the previous year.
• ·       The employee received more than $125,000 in pay for the prior year.

When taxable fringe benefits are treated as paid

You may choose to treat certain taxable noncash fringe benefits as paid by any pay period but must be paid at least annually. You don't have to pay all employees during the same period as long as long as you treat all benefits provided in a calendar year as paid by December 31 of the calendar year.

Withholding on fringe benefits

Employers may add the value of fringe benefits to regular wages and figure withholding taxes on the total. Otherwise, they may withhold federal income tax on the value of the fringe benefits at the flat supplemental wage rate of 22 percent. Special provisions apply if supplemental wages exceed $1 million. Withholding income tax on the value of an employee's personal use of a vehicle is not required but employers must withhold social security and Medicare taxes on the use of the vehicle.

Depositing taxes on fringe benefits

Once you choose when fringe benefits are paid, you must deposit taxes in the same deposit period you treat the fringe benefits as paid. To avoid a penalty, deposit the taxes following the general deposit rules for that deposit period.

 

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