Do Not Forget to Tax These Employee Benefits Before Year-End is Complete
Year-end is a critical time for HR and payroll departments to complete numerous processes, meeting compliance and regulatory requirements. Under-reported and non-taxed fringe benefits is an area of taxable income that has been often overlooked and even misunderstood by many businesses.
Don’t Risk a Tax Audit
If you’re confused about how fringe benefits are defined by IRS tax law, let alone how they are taxed, you’re not alone. In 2014 alone, the IRS imposed $6,848,308 in civil penalties for non-compliance of the proper payment and reporting of employment taxes, including those from fringe benefits. The IRS is working diligently to decrease the amount of uncollected revenues. As a result the probability that your business will be involved in an employment tax audit has never been greater.
Before year-end it is recommended that HR and payroll teams audit fringe benefits that need to be reported on the 2017 W-2. Review your accounts payable and general ledger records for possible unreported taxable items from tax year 2017 including, but not limited to:
- Benefits that exceed monetary thresholds—dependent care assistance in excess of $5,000, group-term life insurance in excess of $50,000, educational assistance in excess of $5,250; monitor for these thresholds
- Expense reimbursements or payments made to third-parties for non-qualified moving expenses
- Meal expenses employees incurred while traveling
- Employer-paid student loan payments
- The fair market value of individual gym memberships, regardless of any applicable corporate discount
- The fair market value of health benefits provided to employees’ domestic partners or civil union partners of either gender
- Dependent group-term life insurance, when the policy exceeds $2,000
- Group-term life insurance greater than $50,000 provided to retirees
- The amount of forgiven loans
- Employee recognition awards that are more than de minimis benefits (e.g., all-expense-paid trips, gift certificates)
- Employee safety awards, prizes, referral bonuses and suggestion awards
- The fair market value of unrestricted gift certificates or gift cards
- Employees’ personal use of company vehicles. For company cars only, income tax withholding is optional. If you choose not to withhold, notify employees that you haven’t withheld and include 100% of the value of their business and personal use in the appropriate boxes on their Forms W-2
Get a jump start on your year-end planning for a smooth transition into the new year.
If you are unsure of everything that your HR and payroll teams must complete before year-end, download our free Year-End HR and Payroll Checklist. This high-level year-end checklist offers HR and payroll professionals an overview of the most critical year-end activities and recommended best practices to support year-end planning and new year strategic initiatives. In this checklist you’ll get guidance on fringe benefits taxation, ACA reporting and filing, pay equity regulations by state, developing training programs, employee misclassifications, the handling of deceased and terminated employees, and much more.