Megan Broomfield, BridgeTower Media Newswires
With 2016 behind us, I would like to remind you about the proper inclusion of fringe benefits in an employee's taxable wages. Fringe benefits are defined as a form of pay for performance of services given by a company to its employees as a benefit. Fringe benefits must be included in an employee's pay unless specifically excluded by law. Please note the actual value of the fringe benefits provided must be determined prior to Dec. 31 in order to allow for the timely withholding and depositing of payroll taxes. Below you will find important information regarding the identification and accounting for several customarily provided fringe benefits.
Please be aware that the 2016 tax year Forms W-2 and 1099-MISC (with income reported in Box 7) are now due to the IRS by Jan. 31, 2017.
The failure to include taxable fringe benefits in an employee's/shareholder's Form W-2 may result in lost deductions and additional tax and civil penalties.
Common Taxable Fringe Benefits
- Employer-paid group-term life insurance coverage in excess of $50,000
This fringe benefit is subject to the withholding of Social Security and Medicare taxes (FICA) only. Though the amount is included in gross wages, federal and state income tax withholding is not required.
- 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, is considered to have been provided under a non-accountable plan and are required to be treated as taxable wages for purposes of federal, state and local (if applicable) 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 (i.e., substantiation with receipts or other records) 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
This fringe benefit (unless reimbursed by the employee) is subject to FICA, FUTA, FIT, and SIT. However, you may elect not to withhold FIT and SIT on the value of this fringe benefit if the employee is properly notified by Jan. 31 of the electing year or 30 days after a vehicle is provided. For administrative convenience, an employer can elect to use the 12-month period beginning Nov. 1 of the prior year and ending Oct. 31 of the current year (or any other 12-month period ending in November or December) to calculate the current year's personal use of a company car if the employee is properly notified no earlier than the employee's last paycheck of the current year and no later than the date the Forms W-2 are distributed. Once 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 all of the tax withholdings of FICA, FUTA, FIT, and SIT.
- De minimis benefits
De minimis benefit amounts can be excluded when the benefit is of so little value (taking into account 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. However, there is no statutory authority for this position. 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, 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. Any portion of such a gift card/certificate redeemed would be included in the employees' Forms W-2 and subject to income and employment taxes as detailed above.
- Value of employee achievement awards, gifts and prizes
This fringe benefit is subject to FICA, FUTA, FITW, and SITW. 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 for employee achievement awards:
Achievement awards for length of service (must be greater than five years and not awarded to the same employee in the prior four years) or safety, each of them being made as part of a meaningful presentation may be excluded from an employee's taxable income. The exclusion applies only for 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 nonqualified (unwritten and discriminatory plans) or up to $1,600 per employee for qualified plans (written and nondiscriminatory plans).
Certain non-cash achievement awards, such as a gold watch at retirement or nominal birthday gifts, may fall within the exclusion for de minimis benefits.
- Value of personal use of employer-provided cellphone
Since Jan. 1, 2010, employer-provided cellphones are no longer treated as a taxable fringe benefit as long as the cellphone is provided to the employee primarily for noncompensatory 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. Notice 2011-72 clarifies the exclusion of the cellphone's value from the employee's income as a working condition fringe benefit.
This change in the law also eliminated the need for the rigorous substantiation of the business use of employer-provided cellphones that were otherwise required for "listed property."
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Megan Broomfield, CPA, is a partner with Mengel, Metzger, Barr & Co. LLP and may be reached at Mbroomfield@mmb-co.com.
Published: Mon, Jan 09, 2017
