Year-End Payroll Considerations–Fringe Benefits

In today’s competitive business environment, offering enticing perks is one of the best ways companies can attract strong candidates. However, increasing your employee benefits may come at the cost of additional tax reporting. It is important to accurately account for all those additional perks you offer your employees before they add up.

Gifts and benefits provided outside of an employee’s regular payroll (wages, insurance, etc.) are often considered fringe benefits. Fringe benefits are generally taxed along with standard wages–with certain exceptions–and are subject to withholding for federal, Social Security, Medicare and state (if applicable) taxes. So, what are some commonly missed fringe benefits in payroll reporting, and how may they affect your company and its employees?

Gifts to Employees

Especially around the holidays, employers may wish to provide their employees with additional incentives and gifts. While this is appreciated, it may create additional taxable earnings for the employee which they may not be aware of. Whether it is providing gift cards or use of a vacation home, all gifts should be reported as non-cash earnings.

Thankfully, per IRC Section 132, some items may be considered de minimis fringe benefits, as they would be so small and infrequent that it would be unreasonable to administrate. Examples of such items that can be excluded are occasional coffee and donuts, flowers for special circumstances, traditional non-cash birthday and holiday gifts, and occasional group meals. Companies may have internal thresholds to determine de minimis values. At this time, the IRS has not specifically stated a specific value threshold for benefits to qualify as de minimis. However, the IRS has ruled that items with a value exceeding $100 cannot be considered de minimis.

When included in employees’ taxable earnings, it is recommended that you ensure your employees know that the gifts are taxable and are made aware the necessary taxes will be withheld from their recurring payroll. Your company can make the decision to fund the withholding on behalf of the employees, and gross-up the taxes for the employee benefit.

Company Provided Cars

In some cases, your employee may be provided a company car to fulfill their role requirements. Some employers allow company cars to be used for personal use, which would be considered a non-cash taxable fringe benefit. Personal use may include daily commute between home and the company office/worksite or non-work-related activities. Ideally, personal use of a company car should be reported in employee wages throughout the year. However, if you have not been including personal use in the employee’s wages, this needs to be included by year-end.

There are a few ways to calculate the amount to report for a company provided car:

General Valuation Method

Value the benefit at its fair market value and compare the fringe benefit to the cost of leasing an equivalent car in the same area as it is being provided.

Lease Value Method

The IRS has provided a chart to determine the annual lease value of a vehicle based on its fair market value. Once determined, multiply the annual lease value by the percent of personal use for the company provided vehicle. Keep in mind that calculations for personal use begin on the first day the benefit is made to the employee, and this method would need to be used for all following years.

Commuting Value

If the vehicle is not allowed for personal use (must be explicitly written), and the vehicle is required in your business trade, then commuting value may be used. For this, there is a $1.50 per one-way commute included in taxable compensation.

Cents Per Mile

For 2024, there is 67 cents applied per mile for personal use. The employee would need to provide to the employer the number of miles they used for personal use for the calendar year. Note that the 2025 cents per mile rates will be updated by the IRS in December.

Fringe Benefits for Remote Workers

We continue to see remote and hybrid business models being used across industries. Remote workers come with their own set of fringe benefits. While some areas are still grey and are dependent on circumstance, such as a remote employee transporting to a physical office, more clarity has been determined overall.

Many companies provide stipends or allowances to remote employees to furnish home offices or complete technology setups. Stipends and allowances should be treated as taxable wage income for the employee. As for physical office furniture provided by the company for a home office, these items would not be taxable. In order to qualify, the office space would need to be used exclusively for a home office. However, ownership of property could create nexus in states, therefore many employers opt to reimburse the employee and input income.

Conclusion

It is important the fringe benefits you offer do not fall through the cracks when it comes to tax reporting. Reporting requirements may vary depending on value and circumstance, so we recommend contacting a certified tax professional to ensure you remain in compliance, both employees and employers alike. If you have questions regarding fringe benefits, send me an email and I’d be happy to discuss.