Taxable Fringe Benefits: What Are They and Why Should I Care?
Rewarding employees with gift cards and other “fringe benefits” can be a reward in and of itself but did you know that the free holiday turkeys you just handed out may be considered taxable income?
Unfortunately, it’s not as easy to dole out cool benefits as many of us originally thought without getting taxes involved. That doesn’t mean you should eschew the fringe benefits—it just means you have to be smart about them!
How the IRS sees it
The IRS defines fringe benefits as ‘a form of pay (including property, services, cash, or cash equivalent) in addition to stated pay for the performance of services.’ This includes many benefits you’re already familiar with, such as health savings accounts, transportation benefits, employee stock options, etc.
How employees are paid and why employers opt for fringe benefits
Employees are typically paid their wages through checks (written or printed), direct deposit, payroll cards, or even, sometimes cash. That’s how people are usually paid, and those wages are all subject to income tax withholding.
Now, employers are required to provide employees with certain kinds of benefits, such as contributions to state disability programs or worker’s compensation coverage. Then there are those employers who want to offer even more benefits to attract or retain top talent, or to reward employees. Almost all of these additional fringe benefits will be taxable, but it’s a matter of whether they’re also reportable.
The tricky part is knowing which things count as reportable fringe benefits, because even though the vast majority are taxable, the taxable portion of any particular fringe benefit might be reduced due to other reasons.
Two things to note:
- Any amount that the recipient pays for the fringe benefit will lower the benefit’s taxable portion.
- Any amount that the law excludes from compensation, like “low-cost holiday gifts” or achievement awards can reduce the taxable portion of the fringe benefit.
Fringe benefits are a good idea for rewarding hard-working employees and making your business one others flock to. To get the most out of them, however, it’s best to consult with a tax expert who can ensure you’ve got your bases covered as far as reporting what needs reporting. You don’t want great perks to cost you or your employees extra, after all.
Coming up with new benefits that require minimal “tax prep”
Sometimes you just want to do something nice for your employees and you don’t want it to be complicated. That’s fair. Your solution could be as simple as throwing something like a holiday party at the office, or hosting a potluck lunch—instead of gifts. Really, throwing a party for everyone is still a wonderful gift; and when it comes to everything taxable and reportable, there’s not much to do with a party.
If your goal is to reward, then reward. Just don’t get hung up on aspects you could probably avoid, like “lavish” gifts that are going to carry heavier tax burdens. I’m sure there’s a time and place for every type of gift, so all I’m saying is to choose your occasion and gifts carefully, and remember that it’s not as easy as gift-wrapping something. You also have to report what needs reported, etc. After all, no one wants a letter from the IRS as a Christmas gift.
Not sure what to do about the Holidays or how to reward and recognize your employees? Reach out and we’ll send you a copy of our “How to Treat Your Employees Like A Million Bucks…without spending a dime!”