Fringe Benefits
By Nancy Faussett, CPA
Publication date: 02/10/2010
Fringe benefits are given to someone in connection with the performance of services. Fringe benefits may be given to an employee, an independent contractor, a director of a corporation, or a partner in a partnership. (Unless otherwise indicated, this article discusses fringe benefits given to employees by their employers.)
There are four types of fringe benefits:
- Taxable (an example is bonuses, which are always taxable),
- Nontaxable (an example is medical care premiums paid by one’s employer),
- Partially taxable (when the fringe benefit has a dollar limitation, such as a transportation subsidy), and
- Tax deferred (an example is an employer’s contribution to an employee’s pension plan that is not taxable until distributed to the employee).
Fringe benefits include property, cash, and cash equivalents.
| When is not performing a service considered a service? You may give a fringe benefit for someone in return for signing a covenant-not-to-compete. The benefit would meet the definition of being received in connection with the performance of a service and, therefore, may be treated as a fringe benefit. |
While many fringe benefits are taxable, there is a long list of exceptions. Furthermore, if an employee reimburses the employer for the fair market value of the benefit, the employee’s gross income is not increased as a result.
Fringe Benefits Excluded from Gross Income
The following fringe benefits, along with a brief description of each, are excluded from the recipient’s gross income, either entirely or in part (although for each of these to be excluded from gross income, there are a multitude of specific requirements, which vary by benefit):
1. Accident and health benefits:
Employer contributions to an accident or health plan are generally excludable from the employees’ income (Sec.106). Such benefits include contributions to an Archer MSA and to a health savings account. However, they do not include employer contributions for long-term care insurance when provided through a flexible spending plan (although such contributions are excluded from social security, Medicare, and FUTA wages.)
2. Achievement awards:
Any tangible personal property given to an employee as an award for either a safety achievement or for length of service is excludable from the employee’s income (Sec.274(j)). However, the exclusion does not apply to cash awards, gift certificates, stocks, or tickets to events. Furthermore, there are limitations on the amounts that may be excluded.
3. Adoption assistance:
Employer-provided adoption assistance, under a written plan, is not includable as income if it is for qualifying expenses. There is a limitation placed on the amount ($10,000 adjusted by inflation), which applies per adoption, but is cumulative over all years. For an adoption of a child with special needs, the $10,000 amount (adjusted for inflation) is excludible from gross income regardless of whether the taxpayer incurs any qualified adoption expenses. The dollar limitation is phased out if the taxpayer’s adjusted gross income exceeds a specified amount. If it is a foreign adoption, qualified adoption expenses do not include any expenses unless the adoption is finalized. (However, any expenses incurred before the year in which the adoption becomes final are taken into account in the year in which the adoption is finalized.) "Qualifying adoption expenses" are the same as those defined under Section 23(d) for the adoption expense credit.
4. Athletic facilities:
The value of any employer-provided athletic facilities on the business premises is excluded from the employee’s gross income (Sec.132(j)(4)). However, to qualify, the facilities must be operated by the employer and used exclusively by the employees and their families.
5. De minimis benefits:
De minimus benefits are too small and infrequent to warrant recordkeeping (such as allowing local telephone calls). Such benefits are excluded from income. Cash, unless very small and given infrequently, is not included in this category of excludable benefits.
6. Dependent care assistance:
Qualified payments made by an employer for an employee’s dependent care assistance are excluded from income if under a specified amount (Sec.129). The payments must be the lesser of $5,000 or the earned income of the employee or spouse. This applies to either dependent care provided by the employer or for amounts paid or reimbursed. The dependent care assistance must be for caring for a qualifying dependent and must enable the employee to be employed. The employer cannot discriminate in favor of highly compensated employees.
7. Educational reimbursements:
Job-related educational expenses are excluded from the employee’s gross income. The education expenses must either improve or maintain job skills or be required by the employer or by law. They cannot qualify the employee for a new trade or business nor be needed to meet minimum educational requirements of the employee’s current position. Educational expenses include the cost of tuition, books, supplies, certain transportation, and can be for either undergraduate or graduate level coursework. These same rules apply to independent contractors.
In addition to the above, other amounts paid by an employer under a qualified educational assistance program but that are not job-related may also be excluded from the employee’s income if certain conditions are met (Sec.127). The requirements for a qualified educational assistance program are that the employer has a written plan and does not discriminate in favor of highly compensated employees. There is a current dollar limitation of $5,250 per employee per calendar year.[1]
Free or reduced tuition available to employees of an educational institution, if nondiscriminatory, may also be excluded from gross income. Generally this is only for undergraduate coursework, but graduate students performing teaching or research work at the institution may take excludable graduate courses. This benefit may also be for the immediate family of the employee.
8. Employee discounts:
Although subject to certain limitations, an employee discount on qualifying property or services is excludable from income as long as the employee provides substantial services. Qualifying property does not include real property or property usually held for investment (such as stocks or bonds). The amount of a discount on services cannot be more than 20% of what is charged to the public for the services. The amount of a discount on merchandise cannot exceed the business’s gross profit percentage times the price the employer charges the public for such property. The employer cannot discriminate in favor of highly compensated employees when offering the discount.
9. Employee stock options:
Incentive stock options (ISOs) are granted to employees to buy stock in the employer corporation. Neither the receipt nor the exercising of the option is a taxable event to the employee. Upon the subsequent purchase and sale of the stock, the employee may have either capital gain or ordinary income (the latter if the employee does not hold the stock for a specified required period of time).
In addition, an employee is not taxed on the receipt or the exercise of the right to purchase stock under an employee stock purchase plan (ESPP). However, as in ISOs, there are certain holding period restrictions once the stock is purchased. Unlike ISOs, there is a limit as to the amount of stock that the employee may purchase. Also, unlike ISOs, the ESPP may have an option price of less than the stock’s FMV on the date of grant.
The third type of stock option is non-statutory (nonqualified) stock options. When such options are exercised, the difference between the exercise price and the FMV of the stock at the time of exercise, is included in wages.
10. Meal allowances/reimbursements:
If reimbursements or allowances for meals, which are substantiated and have a valid business reason, meet the requirements of an accountable plan (see below), they are excludable from income. There are various rules for meals when traveling overnight, meals while not traveling, and entertainment meals.
11. Meals and lodging for employer’s convenience on premises:
When all requirements are met, the fair market value of meals (but not cash) and lodging furnished on the business premises are excluded from income when provided for the employer’s convenience (Sec.119). In addition, in order for lodging to qualify, it must be required as a condition of employment.
12. Military base realignment and closure payments:
Qualified military base realignment and closure payments are nontaxable fringe benefits that are made under the Homeowners Assistance Program (HAP). The payments are intended to offset the negative effect on housing values as a result of a military base realignment or closure (Sec.132(n)). They are made to employees and members of the Armed Forces. The amount excludable from income is limited to the reduction in the property’s FMV.
13. Moving expense reimbursements:
In order for moving expense reimbursements to qualify as a nontaxable fringe benefit, the costs must be for a move directly related to work and not for any personal expenses and they must be made under an accountable plan (see below) (Sec.217). Furthermore there are time and distance requirements. The expenses must usually be incurred within one year from the start of work and the new job must be at least 50 miles further from the former residence than the old job site was from the former residence. Also, the employee must work at least 39 weeks during the first 12 months after the move.
Nontaxable moving costs include the cost of moving household and personal goods, as well as the cost of transportation and lodging for the employee and the employee’s family. They do not include the cost of meals.
14. No-additional-cost services:
Unless covered by another code section, no-additional cost services are not taxable. The covered services must be available for sale to customers in the normal course of business and the employer must not incur any additional costs when providing the benefit to the employee. (Any lost revenue is considered a "cost.") Services provided to an employee’s spouse and dependent children are included. No-additional-cost services are often excess capacity services such as hotel rooms and airline seats.
15. Reimbursement for employee vehicle used for employer’s business:
If made under an accountable plan (see below), reimbursement of an employee’s business vehicle expenses is excludable from income. The employer can either reimburse the employee for actual expenses or can use a mileage allowance.
16. Retirement planning:
Employer-provided retirement planning is excludable from the employees’ income if the employer maintains a qualified retirement plan (Sec.132(m)). This exclusion does not apply to tax preparation, accounting, or legal services.
17. Transportation benefits:
To qualify as a fringe benefit, transportation expenses must generally be for local business travel that does not include an overnight trip (otherwise travel expense rules would govern). However, an employer may reimburse an employee for the cost of transportation expenses for a temporary assignment. Transportation expenses may include the cost of tolls, parking, airfare, taxi fares, and mileage for operating a vehicle. They do not include the cost of meals or lodging.
In addition, there are "qualified transportation" fringe (QTF) benefits that apply when an employer provides benefits to employees to assist with their commuting expenses (Sec.132(f)). There is an allowable monthly amount that, if qualifying, may be excluded from income. The allowable amount is indexed for inflation. For 2009, an employee can exclude from income $120 per month for combined commuter transportation and transit passes and $230 per month for qualified parking. However, the American Recovery and Reinvestment Act of 2009 temporarily, for any month beginning on or after the February 17, 2009 and before January 1, 2011, provides that the same dollar amount in effect for parking reimbursements will also be used for transit benefits and passes. Therefore, the tax-free amount for qualifying transit fringe benefits is $230 per month for 2009. The excludible amount remains at $230 per month for 2010.
18. Working condition benefits:
Excludable from income are qualifying goods and services given to employees to enable the employees to perform their jobs. To qualify, the benefit must:
- Relate to the employer’s business,
- Be deductible by the employee as a business expense if the employee had paid for it, and
- Be substantiated by recordkeeping.
For this purpose an "employee" includes an independent contractor, a director of a corporation, or a partner in a partnership.
An example is a vehicle provided by the employer to an employee for business use. Only business use of an employer-provided vehicle is excludable from income. Personal use is taxable to the employee and added to wages although, instead, either the employer can elect to include all use as wages [2] (but only if the employer uses the lease value method of valuing the benefit) or the employee can pay the employer for any personal use. See the General Valuation Rule below for information on valuing the amount of the benefit of such vehicles.
Accountable Plans
Cash reimbursements for incidental expenses can qualify as a nontaxable fringe benefit if they are made under an accountable plan. To qualify as an "accountable plan:"
- There must be a business connection to the benefit,
- The employee must provide the employer with a proper accounting of how the money was spent, and
- Any excess money paid to the employee must be returned in a timely manner.
General Valuation Rule
Generally, the value of a fringe benefit is its fair market value subject to the consideration of all facts and circumstances.[3] It is not the cost to the employer of providing the benefit, but rather whatever the employee would have had to pay in an arms-length transaction to receive the benefit.
Vehicles
To determine the value of an employer-provided vehicle, use the cost of leasing a similar vehicle. Generally, you cannot value an employee’s business use of such a vehicle by the cents-per-mile calculation (although for the employee’s personal use of the vehicle, the cents-per-mile method may be used) unless the vehicle would have been leased on a cents-per-mile basis. The IRS publishes an Annual Lease Value Table that shows an annual lease value according to the FMV of the vehicle. This is the maximum amount allowed.
If a vehicle is provided to an employee for commuting purposes, the value of the benefit is $1.50 for each one-way commute. This is calculated for each employee if the vehicle is being used in a car pool.
|
Note: While a cell phone given to an employee is a fringe benefit, it is also listed property. As listed property, there are certain recordkeeping requirements. All personal calls made using the phone are taxable income to the employee. At the time this article was written, several bills have been introduced in Congress that would remove cell phones from being considered listed property.
|
Withholding, Depositing, and Reporting Rules
For withholding and employment taxes, an employer can treat most fringe benefits as if paid quarterly, by pay period, or on some other basis, as long as it is not less often than annually. You can also change the selected period whenever you want. The one exception to this is a benefit when property normally held for investment purposes or real property is transferred. With either of these types of property, withholding taxes must be determined on the actual date of the transfer.
During the year, you can estimate the value of fringe benefits for purposes of withholding. However, the actual value of the benefits must be determined no later than January 31 of the following year.
Either the value of the benefit is added to the employee’s wages and withholding taxes are applied to the total or withholding can be applied at a flat 25% rate (use 35% if the total supplemental wages exceed $1,000,000 for the year).
You can treat the value of benefits (not including any transfer of property) that are actually provided in the last two months of the year as if paid in the next year. Although you can handle different benefits differently, if you use this rule (for benefits provided in the last two months of the year) for a particular benefit then you must use it for all of the employees who receive the particular benefit.
Some of the benefits I have referred to are only partially taxable (when they exceed a specified amount). The amount of any excluded benefits, while not subject to federal tax withholding, may be subject to social security, Medicare, or federal unemployment (FUTA) taxes.
When fringe benefits are taxable, they are also subject to employment taxes if the recipient is your employee and are reported on Form W-2. If the recipient is a partner, you report the benefit on Schedule K-1. If the recipient is an independent contractor, you report the benefit on Form 1099-MISC.
[1]If the assistance is over $5,250 or the employer does not have a formal plan, it still may be excludable from the employee’s income if it considered a working condition benefit.
[2]If included in the employee’s wages, the employee can treat the deductible business use of the vehicle as an itemized deduction on Form 1040, Schedule A.
[3]See Reg. 1.61-21(j) for how to value meals at an employer-operated facility and see Reg. 1.61-21(g) and (h) for valuing the use of aircraft.
Fringe Benefits
By Nancy Faussett, CPA
Publication date: 02/10/2010
Fringe benefits are given to someone in connection with the performance of services. Fringe benefits may be given to an employee, an independent contractor, a director of a corporation, or a partner in a partnership. (Unless otherwise indicated, this article discusses fringe benefits given to employees by their employers.)
There are four types of fringe benefits:
- Taxable (an example is bonuses, which are always taxable),
- Nontaxable (an example is medical care premiums paid by one’s employer),
- Partially taxable (when the fringe benefit has a dollar limitation, such as a transportation subsidy), and
- Tax deferred (an example is an employer’s contribution to an employee’s pension plan that is not taxable until distributed to the employee).
Fringe benefits include property, cash, and cash equivalents.
| When is not performing a service considered a service? You may give a fringe benefit for someone in return for signing a covenant-not-to-compete. The benefit would meet the definition of being received in connection with the performance of a service and, therefore, may be treated as a fringe benefit. |
While many fringe benefits are taxable, there is a long list of exceptions. Furthermore, if an employee reimburses the employer for the fair market value of the benefit, the employee’s gross income is not increased as a result.
Fringe Benefits Excluded from Gross Income
The following fringe benefits, along with a brief description of each, are excluded from the recipient’s gross income, either entirely or in part (although for each of these to be excluded from gross income, there are a multitude of specific requirements, which vary by benefit):
1. Accident and health benefits:
Employer contributions to an accident or health plan are generally excludable from the employees’ income (Sec.106). Such benefits include contributions to an Archer MSA and to a health savings account. However, they do not include employer contributions for long-term care insurance when provided through a flexible spending plan (although such contributions are excluded from social security, Medicare, and FUTA wages.)
2. Achievement awards:
Any tangible personal property given to an employee as an award for either a safety achievement or for length of service is excludable from the employee’s income (Sec.274(j)). However, the exclusion does not apply to cash awards, gift certificates, stocks, or tickets to events. Furthermore, there are limitations on the amounts that may be excluded.
3. Adoption assistance:
Employer-provided adoption assistance, under a written plan, is not includable as income if it is for qualifying expenses. There is a limitation placed on the amount ($10,000 adjusted by inflation), which applies per adoption, but is cumulative over all years. For an adoption of a child with special needs, the $10,000 amount (adjusted for inflation) is excludible from gross income regardless of whether the taxpayer incurs any qualified adoption expenses. The dollar limitation is phased out if the taxpayer’s adjusted gross income exceeds a specified amount. If it is a foreign adoption, qualified adoption expenses do not include any expenses unless the adoption is finalized. (However, any expenses incurred before the year in which the adoption becomes final are taken into account in the year in which the adoption is finalized.) "Qualifying adoption expenses" are the same as those defined under Section 23(d) for the adoption expense credit.
4. Athletic facilities:
The value of any employer-provided athletic facilities on the business premises is excluded from the employee’s gross income (Sec.132(j)(4)). However, to qualify, the facilities must be operated by the employer and used exclusively by the employees and their families.
5. De minimis benefits:
De minimus benefits are too small and infrequent to warrant recordkeeping (such as allowing local telephone calls). Such benefits are excluded from income. Cash, unless very small and given infrequently, is not included in this category of excludable benefits.
6. Dependent care assistance:
Qualified payments made by an employer for an employee’s dependent care assistance are excluded from income if under a specified amount (Sec.129). The payments must be the lesser of $5,000 or the earned income of the employee or spouse. This applies to either dependent care provided by the employer or for amounts paid or reimbursed. The dependent care assistance must be for caring for a qualifying dependent and must enable the employee to be employed. The employer cannot discriminate in favor of highly compensated employees.
7. Educational reimbursements:
Job-related educational expenses are excluded from the employee’s gross income. The education expenses must either improve or maintain job skills or be required by the employer or by law. They cannot qualify the employee for a new trade or business nor be needed to meet minimum educational requirements of the employee’s current position. Educational expenses include the cost of tuition, books, supplies, certain transportation, and can be for either undergraduate or graduate level coursework. These same rules apply to independent contractors.
In addition to the above, other amounts paid by an employer under a qualified educational assistance program but that are not job-related may also be excluded from the employee’s income if certain conditions are met (Sec.127). The requirements for a qualified educational assistance program are that the employer has a written plan and does not discriminate in favor of highly compensated employees. There is a current dollar limitation of $5,250 per employee per calendar year.[1]
Free or reduced tuition available to employees of an educational institution, if nondiscriminatory, may also be excluded from gross income. Generally this is only for undergraduate coursework, but graduate students performing teaching or research work at the institution may take excludable graduate courses. This benefit may also be for the immediate family of the employee.
8. Employee discounts:
Although subject to certain limitations, an employee discount on qualifying property or services is excludable from income as long as the employee provides substantial services. Qualifying property does not include real property or property usually held for investment (such as stocks or bonds). The amount of a discount on services cannot be more than 20% of what is charged to the public for the services. The amount of a discount on merchandise cannot exceed the business’s gross profit percentage times the price the employer charges the public for such property. The employer cannot discriminate in favor of highly compensated employees when offering the discount.
9. Employee stock options:
Incentive stock options (ISOs) are granted to employees to buy stock in the employer corporation. Neither the receipt nor the exercising of the option is a taxable event to the employee. Upon the subsequent purchase and sale of the stock, the employee may have either capital gain or ordinary income (the latter if the employee does not hold the stock for a specified required period of time).
In addition, an employee is not taxed on the receipt or the exercise of the right to purchase stock under an employee stock purchase plan (ESPP). However, as in ISOs, there are certain holding period restrictions once the stock is purchased. Unlike ISOs, there is a limit as to the amount of stock that the employee may purchase. Also, unlike ISOs, the ESPP may have an option price of less than the stock’s FMV on the date of grant.
The third type of stock option is non-statutory (nonqualified) stock options. When such options are exercised, the difference between the exercise price and the FMV of the stock at the time of exercise, is included in wages.
10. Meal allowances/reimbursements:
If reimbursements or allowances for meals, which are substantiated and have a valid business reason, meet the requirements of an accountable plan (see below), they are excludable from income. There are various rules for meals when traveling overnight, meals while not traveling, and entertainment meals.
11. Meals and lodging for employer’s convenience on premises:
When all requirements are met, the fair market value of meals (but not cash) and lodging furnished on the business premises are excluded from income when provided for the employer’s convenience (Sec.119). In addition, in order for lodging to qualify, it must be required as a condition of employment.
12. Military base realignment and closure payments:
Qualified military base realignment and closure payments are nontaxable fringe benefits that are made under the Homeowners Assistance Program (HAP). The payments are intended to offset the negative effect on housing values as a result of a military base realignment or closure (Sec.132(n)). They are made to employees and members of the Armed Forces. The amount excludable from income is limited to the reduction in the property’s FMV.
13. Moving expense reimbursements:
In order for moving expense reimbursements to qualify as a nontaxable fringe benefit, the costs must be for a move directly related to work and not for any personal expenses and they must be made under an accountable plan (see below) (Sec.217). Furthermore there are time and distance requirements. The expenses must usually be incurred within one year from the start of work and the new job must be at least 50 miles further from the former residence than the old job site was from the former residence. Also, the employee must work at least 39 weeks during the first 12 months after the move.
Nontaxable moving costs include the cost of moving household and personal goods, as well as the cost of transportation and lodging for the employee and the employee’s family. They do not include the cost of meals.
14. No-additional-cost services:
Unless covered by another code section, no-additional cost services are not taxable. The covered services must be available for sale to customers in the normal course of business and the employer must not incur any additional costs when providing the benefit to the employee. (Any lost revenue is considered a "cost.") Services provided to an employee’s spouse and dependent children are included. No-additional-cost services are often excess capacity services such as hotel rooms and airline seats.
15. Reimbursement for employee vehicle used for employer’s business:
If made under an accountable plan (see below), reimbursement of an employee’s business vehicle expenses is excludable from income. The employer can either reimburse the employee for actual expenses or can use a mileage allowance.
16. Retirement planning:
Employer-provided retirement planning is excludable from the employees’ income if the employer maintains a qualified retirement plan (Sec.132(m)). This exclusion does not apply to tax preparation, accounting, or legal services.
17. Transportation benefits:
To qualify as a fringe benefit, transportation expenses must generally be for local business travel that does not include an overnight trip (otherwise travel expense rules would govern). However, an employer may reimburse an employee for the cost of transportation expenses for a temporary assignment. Transportation expenses may include the cost of tolls, parking, airfare, taxi fares, and mileage for operating a vehicle. They do not include the cost of meals or lodging.
In addition, there are "qualified transportation" fringe (QTF) benefits that apply when an employer provides benefits to employees to assist with their commuting expenses (Sec.132(f)). There is an allowable monthly amount that, if qualifying, may be excluded from income. The allowable amount is indexed for inflation. For 2009, an employee can exclude from income $120 per month for combined commuter transportation and transit passes and $230 per month for qualified parking. However, the American Recovery and Reinvestment Act of 2009 temporarily, for any month beginning on or after the February 17, 2009 and before January 1, 2011, provides that the same dollar amount in effect for parking reimbursements will also be used for transit benefits and passes. Therefore, the tax-free amount for qualifying transit fringe benefits is $230 per month for 2009. The excludible amount remains at $230 per month for 2010.
18. Working condition benefits:
Excludable from income are qualifying goods and services given to employees to enable the employees to perform their jobs. To qualify, the benefit must:
- Relate to the employer’s business,
- Be deductible by the employee as a business expense if the employee had paid for it, and
- Be substantiated by recordkeeping.
For this purpose an "employee" includes an independent contractor, a director of a corporation, or a partner in a partnership.
An example is a vehicle provided by the employer to an employee for business use. Only business use of an employer-provided vehicle is excludable from income. Personal use is taxable to the employee and added to wages although, instead, either the employer can elect to include all use as wages [2] (but only if the employer uses the lease value method of valuing the benefit) or the employee can pay the employer for any personal use. See the General Valuation Rule below for information on valuing the amount of the benefit of such vehicles.
Accountable Plans
Cash reimbursements for incidental expenses can qualify as a nontaxable fringe benefit if they are made under an accountable plan. To qualify as an "accountable plan:"
- There must be a business connection to the benefit,
- The employee must provide the employer with a proper accounting of how the money was spent, and
- Any excess money paid to the employee must be returned in a timely manner.
General Valuation Rule
Generally, the value of a fringe benefit is its fair market value subject to the consideration of all facts and circumstances.[3] It is not the cost to the employer of providing the benefit, but rather whatever the employee would have had to pay in an arms-length transaction to receive the benefit.
Vehicles
To determine the value of an employer-provided vehicle, use the cost of leasing a similar vehicle. Generally, you cannot value an employee’s business use of such a vehicle by the cents-per-mile calculation (although for the employee’s personal use of the vehicle, the cents-per-mile method may be used) unless the vehicle would have been leased on a cents-per-mile basis. The IRS publishes an Annual Lease Value Table that shows an annual lease value according to the FMV of the vehicle. This is the maximum amount allowed.
If a vehicle is provided to an employee for commuting purposes, the value of the benefit is $1.50 for each one-way commute. This is calculated for each employee if the vehicle is being used in a car pool.
|
Note: While a cell phone given to an employee is a fringe benefit, it is also listed property. As listed property, there are certain recordkeeping requirements. All personal calls made using the phone are taxable income to the employee. At the time this article was written, several bills have been introduced in Congress that would remove cell phones from being considered listed property.
|
Withholding, Depositing, and Reporting Rules
For withholding and employment taxes, an employer can treat most fringe benefits as if paid quarterly, by pay period, or on some other basis, as long as it is not less often than annually. You can also change the selected period whenever you want. The one exception to this is a benefit when property normally held for investment purposes or real property is transferred. With either of these types of property, withholding taxes must be determined on the actual date of the transfer.
During the year, you can estimate the value of fringe benefits for purposes of withholding. However, the actual value of the benefits must be determined no later than January 31 of the following year.
Either the value of the benefit is added to the employee’s wages and withholding taxes are applied to the total or withholding can be applied at a flat 25% rate (use 35% if the total supplemental wages exceed $1,000,000 for the year).
You can treat the value of benefits (not including any transfer of property) that are actually provided in the last two months of the year as if paid in the next year. Although you can handle different benefits differently, if you use this rule (for benefits provided in the last two months of the year) for a particular benefit then you must use it for all of the employees who receive the particular benefit.
Some of the benefits I have referred to are only partially taxable (when they exceed a specified amount). The amount of any excluded benefits, while not subject to federal tax withholding, may be subject to social security, Medicare, or federal unemployment (FUTA) taxes.
When fringe benefits are taxable, they are also subject to employment taxes if the recipient is your employee and are reported on Form W-2. If the recipient is a partner, you report the benefit on Schedule K-1. If the recipient is an independent contractor, you report the benefit on Form 1099-MISC.
[1]If the assistance is over $5,250 or the employer does not have a formal plan, it still may be excludable from the employee’s income if it considered a working condition benefit.
[2]If included in the employee’s wages, the employee can treat the deductible business use of the vehicle as an itemized deduction on Form 1040, Schedule A.
[3]See Reg. 1.61-21(j) for how to value meals at an employer-operated facility and see Reg. 1.61-21(g) and (h) for valuing the use of aircraft.
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