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Fringe Benefit Reporting
As the year draws to a close, we want to remind you about including taxable fringe benefits in all applicable employees' and/or shareholders' 2012 taxable wages. Fringe benefits are defined as a form of pay for performance of services given by a company to its employees and/or shareholders as a benefit. Fringe benefits must be included in an employee's pay unless specifically excluded by law. Please note that failure to include taxable fringe benefits in an employee's/shareholder's Form W-2 may result in lost deductions and additional tax and penalties. Below you will find important information regarding the identification and accounting for several customarily provided fringe benefits. If you have a question about a fringe benefit that is not addressed below, please don't hesitate to contact us.
Common Taxable Fringe Benefits
Employer-paid group-term life insurance in excess of $50,000
This fringe benefit is subject to OASDI (FICA)/Medicare only. Though the amount is included in gross wages, federal and state income tax withholding is not required.
Employee business expense reimbursements/allowances under non-accountable plans
This fringe benefit is subject to OASDI (FICA)/Medicare, FUTA, FITW and SITW. If an employee received an allowance/reimbursement from the company for company related expenses (i.e., travel, a car, etc.), then the amount should be included in the employee's wages. If the employee gave an accounting (adequate substantiation) of the expenses incurred or used IRS per diem amounts (i.e., filled out an expense voucher and refunded any excess allowances/reimbursements to the company), then there is no amount to be added to the Form W‑2. If, however, the employee kept any amounts in excess of the expenses accounted for, or did not provide an accounting (adequate substantiation) of the expenses incurred, all of the reimbursed expenses should be added to taxable wages on the Form W-2.
Value of personal use of company car
This fringe benefit (unless reimbursed by the employee) is subject to OASDI (FICA)/Medicare, FUTA, FITW and SITW. However, you may elect not to withhold FITW and SITW on the value of this fringe benefit if the employee is properly notified by January 31 of the electing year or 30 days after a vehicle is provided. For administrative convenience, an employer can elect to use the 12 month period beginning November 1 of the prior year and ending October 31 of the current year (or any other 12 month period ending in November and December) to calculate the current year's personal use of a company car if the employee is properly notified no earlier than the employee’s last paycheck of the current year and no later than the date the W-2 forms are distributed. Once elected, the same accounting period generally must be used for all subsequent years with respect to the same auto and employee.
Value of qualified transportation fringe benefits
Any qualified commuting and parking amounts provided to the employee by the employer in excess of the statutory limits are subject to OASDI (FICA)/Medicare, FUTA, FITW and SITW. For 2012, the statutory limits are $240 per month for qualified parking and $125 per month for van pooling and transit passes. Employers can also exclude up to $20 per month for qualified bicycle commuting reimbursement.
Value of personal use of employer-provided cell phone
The passage of the Small Business Jobs Act of 2010, H.R. 5297 eliminated the strict substantiation requirements for employer-provided cell phones. The fair market value of the personal use of an employer provided cell phone that is predominately used for business purposes is excluded from the employee’s gross income.
S Corporation Adjustments
In addition to the adjustments previously discussed, an S corporation must include certain fringe benefit items on the Form W-2 of any shareholder that had, directly or indirectly, a greater than 2% ownership on any day during the tax year. These fringe benefits are generally excluded from income of other employees. If these fringe benefits are not included in the shareholder’s Form W‑2 then they are not deductible for tax purposes. This will result in a mismatch of benefits and expenses among the shareholder and the shareholder usually ends up paying more tax than if the fringe benefits had been properly reported on Form W-2.
The includable fringe benefits are items paid by the S corporation for:
Health, dental, vision, hospital and accident (AD&D) insurance premiums, and qualified long term care (LTC) insurance premiums paid under a corporate plan
This fringe benefit is subject to FITW and SITW only (not OASDI [FICA]/Medicare or FUTA). This amount includes premiums paid by the S corporation on behalf of a shareholder with ownership of 2% or greater and amounts reimbursed by the S corporation for premiums paid directly by the shareholder. If the shareholder partially reimburses the S corporation for the premiums, using post-tax payroll deductions, the net amount of premiums must be included in the shareholder’s compensation. A 2% or greater shareholder cannot use pre-tax payroll deductions to reimburse premiums paid by the S corporation.
According to Notice 2008-1, any health insurance premiums that are not included in the shareholder’s W-2 are not eligible to be deducted by the S corporation.
Employer contributions into health savings accounts (HSA)
This fringe benefit is subject to FITW and SITW only (not OASDI [FICA]/Medicare or FUTA). If the shareholder partially reimburses the S corporation for the HSA contribution, using post-tax payroll deductions, the net amount of the contribution must be included in the shareholder’s compensation. 2% or greater shareholders cannot use pre-tax payroll deductions to reimburse HSA contributions paid by the S corporation.
Short-term and long-term disability premiums
These fringe benefits are subject to OASDI (FICA)/Medicare, FUTA, FITW and SITW.
Group-term life insurance premiums
All group-term life insurance premiums are taxed, not just those in excess of $50,000. The premiums are subject to OASDI (FICA)/Medicare only. The premiums are not subject to FUTA, FITW and SITW. Please note that you should not include in the shareholder's Form W-2 any premiums on policies for which the corporation is both the shareholder and beneficiary.
Other taxable fringe benefits
Shareholders with 2% or greater ownership of an S corporation are ineligible to participate in an S corporation's cafeteria plan. All shareholder benefits derived from the cafeteria plan must be included in shareholders' compensation. A cafeteria plan may be terminated upon IRS audit, if a greater than 2% shareholder of an S corporation participates. In addition, employee achievement awards, qualified transportation fringe benefits, qualified adoption assistance, employer contributions to medical savings account (MSA), qualified moving expense reimbursements, personal use of employer-provided property, services, or meals and lodging furnished for the convenience of the employer must also be included as compensation to shareholders with greater than 2% of an S corporation. All the above fringe benefits are subject to OASDI (FICA)/Medicare, FUTA, FITW and SITW.
Nontaxable fringe benefits
The following fringe benefits are NOT includible in the compensation of shareholders with greater than 2% of an S corporation: qualified retirement plan contributions, qualified educational assistance up to $5,250, qualified dependent care assistance up to $5,000, qualified retirement planning services, no-additional-cost services, qualified employee discounts, working condition fringe benefits, minimal fringe benefits, and on-premises athletic facilities.
Accounting for the Adjustments
Once you have identified the fringe benefits subject to tax, you must choose a method to account for them. The following are methods generally used to account for fringe benefits:
Method 1: Gross-up the fringe benefit to cover payroll taxes and add the grossed-up amount to the Form W-2.
Method 2: Treat the fringe benefit amount as the gross pay and withhold the corresponding payroll taxes from the employee's last paycheck.
Method 3: Have the employee reimburse the company for the amount of the fringe benefit.