What are Fringe Benefits?
“Fringe benefits are benefits provided by an employer to an employee, independent contractor or partner, some of which are tax-exempt when certain conditions are met. Recipients of taxable fringe benefits have to include the fair market value of the benefit in their taxable income for the year.”
Fringe Benefit Taxation
Any fringe benefit offered to an employee is taxable, although there is a lengthy list of excluded fringe benefits listed in IRS Pub 15 B. There are a few on the list that are tax-free as long as the total value remains under the IRS limit. As with most IRS-related rules, the language can be somewhat confusing and can often raise more questions than not.
The fair market value of a fringe benefit needs to be included on the employee’s W-2 at year-end. The fair market value is what the benefit would have cost the employee if they had gone out and purchased it in an “arm’s-length” transaction. The fringe benefit valuation rules are lengthy and involved, and require careful studying to be sure they are applied correctly.
One of the things that are excluded from the taxation rules are “de minimis” benefits. De minimis benefits are those that are of a relatively insignificant value (overtime meal money, transportation fare, e.g.).
Withholding on Fringe Benefits
When employees are given fringe benefits, withholding must be taken out based on the fair market value and the IRS valuation rules. There is no requirement with choosing the frequency of the withholding, but it has to be done at least once per year by December 31st and sent to the employee in the W2 no later than January 31st of the following year.
From an employee point of view, it might be beneficial to take out the withholding on a per pay period basis, rather than waiting to lump it all into one pay statement. The good news here is that you don’t have to treat all employees the same in regard to the withholding period. You can also choose to change the withholding period at any time.
Whenever a complicated topic such as fringe benefit taxation is part of a company’s payroll profile, choosing a well-qualified and expert CPA firm to help is extremely important, not just in the day-to-day operations, but also in the planning aspect as well. Planning and execution are vital to financial success. Please contact us and let us show you how we can help you succeed.