While many employees can view their fringe benefits (like health insurance, 401(k) matches, and moving allowances) as “free money,” employers who must pay taxes on many of these benefits know they are anything but. With 2018 rapidly approaching and the future of corporate tax rates still very much up in the air, there’s never been a better time to get your books in order to determine your precise tax liability for the benefits you’ve offered in 2017. Read on to learn more about the basics of taxation of fringe benefits.
What Types of Benefits are Included?
Fringe benefits are broadly defined as an alternative form of payment for services. This generally encompasses any non-cash benefits provided to employees and independent contractors in addition to their regular wages, regardless of whether these benefits are provided directly by you or by another third party (for example, a health insurance company).
Some common fringe benefits include:
- Employer-paid health insurance premiums
- Employer HSA contributions
- 401(k) matches
- Conference attendance and travel reimbursement
- Business expense reimbursement
- Moving expenses
- Employee discounts
- Prizes, awards, and performance bonuses; and
- Tuition assistance.
Although many employers provide employees with things like tools, work uniforms, and other items necessary to perform their jobs, these aren’t generally considered “fringe benefits” unless the employee is free to take the items with him or her after leaving employment.
Why Are Fringe Benefits Subject to Taxes?
Because fringe benefits are simply another type of compensation, they’re subject to taxes and employment taxes just like wage income.
In most cases, employers will pay these taxes rather than impose them on employees. If you do want your employees to cover a portion of these taxes, you’ll want to ensure you’re up-front about this expectation so that they’re not hit with a surprise tax bill next year.
Some states impose additional tax rates on fringe benefits and may define their taxability through different parameters. For example, some states will assess taxes on fringe benefits that are provided to domestic partners, while others only tax benefits that are provided to spouses.
What Can You Do to Reduce Your Tax Liability?
You’ll generally need to report any cash-based fringe benefits or transfers of property as though they were paid during the tax year in which they were provided. However, non-cash fringe benefits awarded to employees during November and December of each tax year can be counted as “paid” during the following year under a special accounting rule.
This provides a dual benefit: first, it allows you to use the end of the year to wrap up your other tax reporting obligations and ensure you’re beginning 2018 with a clean slate, and second, it can help you move tax liabilities on these benefits from the 2017 tax year to 2018, which may bring lower corporate tax rates if Congress takes action on a tax bill.
If the prospect of computing the value and tax liability for the fringe benefits you’ve offered employees seems confusing, Klein Hall CPAs is here to help. Entrusting Klein Hall with your business’s complex tax needs can take this task off your plate while ensuring you’re operating as efficiently as possible.