Common Taxable Employee Fringe Benefits
As 2019 draws to a close, we would like to remind you of the importance of reporting the proper inclusion of common fringe benefits in taxable wages for employees, officers, and shareholders. Fringe benefits are defined as a form of pay-for-performance of services given by a company to its employees as a benefit and must be included in an employee’s pay unless specifically excluded by law.
The three most common fringe benefits are:
- personal use of a company vehicle
- life insurance premiums paid by the company
- health insurance coverage
We recommend determining the value of the fringe benefits prior to year-end in order to allow for the timely withholding and depositing of payroll taxes. We also remind you that failure to properly report to the recipient and the IRS on Form W-2 or Form 1099 may result in lost deductions and additional tax and civil penalties.
We have provided information below regarding the identification and tax reporting for several fringe benefits that are typically provided. To assist you, our firm is available to calculate taxable fringe benefits to be included in your year-end payroll.
It is important to allow enough time to calculate the fringe benefits and provide them to your payroll provider before the last pay period of the year in which to report this additional income and to withhold taxes. If you use a payroll service, we are also available to help you determine if they are reporting your taxable fringe benefits appropriately.
Key examples of fringe benefits to consider include the following:
Employer-paid group-term life insurance coverage in excess of $50,000
Group-term life insurance coverage in excess of $50,000 is subject to only the withholding of Social Security and Medicare taxes (FICA). Though the amount is included in taxable wages, withholding of federal income tax (FIT) and state income tax (SIT) is not required.
Complete the Employer-Provided Life Insurance Worksheet for those employees and/or owners who have life insurance policies paid for by the Company with face values in excess of $50,000. For S Corporation shareholders, the $50,000 threshold does not apply; you must report all life insurance premiums paid on behalf of an S Corporation shareholder.
Employee business expense reimbursements/allowances under non-accountable plans
Any payments of an allowance/reimbursement of business expenses for which the employee does not provide an adequate accounting (i.e., substantiation with receipts or other records), or return any excess allowance/reimbursement to the company, are considered to have been provided under a non-accountable plan and are required to be treated as taxable wages for purposes of federal and applicable state and local income tax withholding; employer and employee FICA tax; and federal and state unemployment taxes (FUTA and SUTA). However, if the employee provides an adequate accounting of the expenses incurred or is “deemed” to have substantiated the amount of expenses under a per diem arrangement, then the reimbursement amounts are excludable from taxable income/wages.
Value of personal use of company car
The value of personal use of a company vehicle must be treated (unless reimbursed by the employee) as additional wages on any frequency chosen by the employer, up to and including an annual basis.
For administrative convenience, an employer can calculate the value of the personal use for the current year based on the 12-month period beginning November 1 of the prior year and ending October 31 of the current year (or any other 12-month period ending in November or December). Once this valuation period is elected, the same accounting period generally must be used for all subsequent years with respect to the same automobile and employee.
Many companies have moved away from providing company cars in lieu of a cash payment to reimburse the employee for the business use of their personal automobile. Car allowances paid in cash without any substantiation of business use are fully taxable and subject to FICA, FUTA, FIT, and SIT withholdings.
For those employees and company owners with access to an employer-provided vehicle, you should complete a copy of the Employee Representation Regarding Use of Company Vehicle Worksheet. Reproduce as many copies as needed and have each employee with access to a company vehicle complete the form. It is not necessary to report the use of delivery vehicles, on-call vehicles, or other vehicles used only on the job.
Value of personal use of company aircraft
This fringe benefit (unless reimbursed by the employee to the extent permitted under FAA rule) is subject to FICA, FUTA, FITW, and SITW. The value calculated is based on the Standard Industry Fare Level formula provided by the IRS. Expenses related to personal entertainment use by officers, directors, and 10 percent or greater owners that are in excess of the value treated as compensation to key employees are non-deductible corporate expenses. Feel free to contact us for assistance calculating the value of the personal use of a company aircraft.
Benefits that exceed the de minimis exclusion
De minimis (minimal) benefit amounts can be excluded when the benefit is of so little value (considering the frequency) that accounting for it would be unreasonable or administratively impractical. A common misconception is that if a fringe benefit is less than $25, then it is automatically considered a de minimis benefit. If a fringe benefit does not qualify as de minimis, generally the entire amount of the benefit is subject to income and employment taxes (FICA, FUTA, FITW, and SITW). De minimis benefits never include cash, gift cards/certificates or cash equivalent items no matter how little the amount, season tickets to sporting or theater events, use of an employer’s home, apartment, boat, or vacation home, and country club or athletic facility memberships.
Gift cards/certificates that cannot be converted to cash and are otherwise a de minimis fringe benefit, and which is redeemable for only specific merchandise, such as ham, turkey, or other item of similar nominal value, would be excluded from income. However, gift cards/certificates that are redeemable for a significant variety of items are deemed to be cash equivalents and are included in the employees’ wages and subject to income and employment taxes as detailed above.
Value of employee achievement awards, gifts and prizes
In general, employee achievement awards, gifts, and prizes that do not specifically qualify for exclusion are only deductible for the employer up to $25 per person per year, unless the excess is included as taxable compensation for the recipient. Any gifts in excess of $25 per person per year to employees in the form of tangible or intangible property are includable as a taxable fringe benefit for employees. There are two exclusions from the general rule, (i) achievement awards for length of service or safety, and (ii) certain non-cash achievement awards, such as a gold watch at retirement or nominal birthday gifts, that fall within the exclusion for de minimis benefits.
The exclusion applies only to awards of tangible personal property and is not available for awards of cash, gift cards/certificates, or equivalent items. The exclusion for employee achievement awards is limited to $400 per employee for non-qualified plans (unwritten and/or discriminatory plans) or up to $1,600 per employee for qualified plans (written and non-discriminatory plans).
This fringe benefit is subject to FICA, FUTA, FITW, and SITW.
Value of qualified transportation fringe benefits
No deduction is allowed for qualified transportation benefits, whether provided directly by the Company, through a reimbursement arrangement, or through a compensation reduction agreement. While you may no longer deduct payments for qualified transportation benefits, the fringe benefit exclusion rules still apply, and the payments may be excluded from your employee’s wages.
Qualified commuting and parking amounts provided to the employee by the employer in excess of the monthly statutory limits are subject to FICA, FUTA, FITW, and SITW. For 2019, the statutory limits are $265 per month for qualified parking AND $265 for transit passes and van pooling. An employee can be provided both benefits for a total of $530 per month tax free with the excess being included in Form W-2. Note, that amounts exceeding the limits cannot be excluded as de minimis fringe benefits.
Also, the value of any de minimis transportation benefit provided to an employee can be excluded from Form W-2. A de minimis transportation benefit is any local transportation benefit provided to an employee that has so little value, after considering the frequency, that accounting for it would be unreasonable. For example, an occasional taxi fare home for an employee working overtime or departing a business function such as a holiday party may be provided tax-free.
Cell phone without business reason
Since January 1, 2010, employer-provided cell phones are no longer treated as a taxable fringe benefit as long as the cell phone is provided to the employee primarily for non-compensatory business reasons, such as the employer’s need to contact the employee at all times for work-related emergencies, or the need for the employee to be available to speak to clients when the employee is away from the office. Similarly, the employer can exclude reimbursements to an employee for business use of a personal cell phone.
Employer expenses related to cell phones provided to an employee that does not have a business reason for being in contact at all times for work-related emergencies or to speak to clients when away from the office, should be included in the employee’s taxable income.
Rules require taxation of certain employee fringe benefits to two percent S Corporation shareholders
In addition to the adjustments previously discussed, certain otherwise excludable fringe benefit items are required to be included as taxable wages when provided to any two percent or greater shareholder of an S Corporation. A two-percent shareholder is any person who owns, directly or indirectly, on any day during the taxable year, more than two percent of the outstanding stock or stock possessing more than two percent of the total combined voting power. This includes the spouse, child, grandchild, or parent of a two-percent shareholder. These fringe benefits are generally excluded from the income of other employees but are taxable to two-percent S Corporation shareholders, similar to partners. If these fringe benefits are not included in the shareholder’s Form W-2, then they are not deductible for tax purposes by the S Corporation.
The includable fringe benefits are items paid by the S Corporation for the following:
Health, dental, vision, hospital, and accident (AD&D) insurance premiums, and qualified long-term care (LTC) insurance premiums paid under a corporate plan
These fringe benefits are subject to FITW and SITW only (not FICA or FUTA). These amounts include premiums paid by the S Corporation on behalf of a two-percent shareholder and amounts reimbursed by the S Corporation for premiums paid directly by the shareholder. If the shareholder partially reimburses the S Corporation for the premiums, using post-tax payroll deductions, the net amount of premiums must be included in the shareholder’s compensation. Two-percent shareholders cannot use pre-tax payroll deductions to reimburse premiums paid by the S Corporation.
For S Corporations paying health insurance premiums for its two-percent shareholders, complete the S Corporation Health Insurance Provided to 2% Shareholders Worksheet. Reproduce and complete one sheet for each applicable shareholder. Please be aware that health insurance premiums paid on behalf of a 2% shareholder may be subject to social security and Medicare taxes if a group health plan is not available to all employees.
Employer Contributions to Health Savings Accounts and Other Tax Favored Health Plans
This fringe benefit is subject to FITW and SITW only (not FICA or FUTA). If the shareholder partially reimburses the S corporation for the health plan contribution, using post-tax payroll deductions, the net amount of the contribution must be included in the shareholder’s compensation. Two-percent shareholders cannot use pre-tax payroll deductions to reimburse plan contributions paid by the S Corporation. However, these two-percent owners can take a corresponding above-the-line deduction for the cost of their health plan contributions on their personal tax return.
Short-Term and Long-Term Disability Premiums
These fringe benefits are subject to FICA, FUTA, FITW, and SITW.
Group-Term Life Insurance Coverage
The entire premium paid on behalf of a two-percent shareholder under a group-term life insurance policy is treated as taxable, not just the premium for coverage in excess of $50,000. These payments should be included in boxes 1, 3, and 5 of the shareholder’s W-2. However, they are not subject to FUTA. The cost of the insurance coverage is subject to FICA tax withholding only and is not subject to FITW, or SITW. Please note that any life insurance coverage for which the corporation is both the owner and beneficiary (e.g., key man life insurance) does not meet the definition of group-term life insurance and therefore there is no income inclusion in the shareholder’s Form W-2.
Other Taxable Fringe Benefits
Employee achievement awards, qualified transportation fringe benefits, qualified adoption assistance, employer contributions to medical savings account (MSA), personal use of employer-provided property or services, and meals and lodging furnished for the convenience of the employer must also be included as compensation to two-percent shareholders of an S corporation. All these fringe benefits are subject to FICA, FUTA, FITW, and SITW.
Nontaxable fringe benefits
The following fringe benefits are NOT includable in the compensation of two-percent shareholders of an S Corporation: qualified retirement plan contributions, qualified educational assistance up to $5,250, qualified dependent care assistance up to $5,000, retirement planning services, no-additional-cost services, qualified employee discounts, working condition fringe benefits, de minimis fringe benefits, and on-premises athletic facilities.
If upon reading this article, you have any questions or would like help with your fringe benefit calculations, feel free to email your Smith Leonard tax advisor or email email@example.com.