Compensation & Benefits Alert - December 2016

December 2016

Fringe Benefit Items to Include On 2016 Form W-2


As 2016 draws to a close, we would like to remind you about the proper inclusion of fringe benefits in an employee’s and/or shareholder’s 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 the actual value of the fringe benefits provided must be determined prior to December 31 in order to allow for the timely withholding and depositing of payroll taxes. Below you will find important information regarding the identification and accounting for several customarily provided fringe benefits.
 
Please be aware that the 2016 tax year Forms W-2 and 1099-MISC (with income reported in Box 7) are now due to the IRS by January 31, 2017.
 
The failure to include taxable fringe benefits in an employee’s/shareholder’s Form W‑2 may result in lost deductions and additional tax and civil penalties.
 

Common Taxable Fringe Benefits
 

Employer-paid group-term life insurance coverage in excess of $50,000
 
This fringe benefit is subject to the withholding of Social Security and Medicare taxes (FICA) 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
 
Any payments of an allowance/reimbursement of business expenses for which the employee does not provide an adequate accounting (i.e., substantiation with receipts or other records), or return any excess allowance/reimbursement to the company, is considered to have been provided under a non-accountable plan and are required to be treated as taxable wages for purposes of federal, state and local (if applicable) income tax withholding; employer and employee FICA tax; and federal and state unemployment taxes (FUTA and SUTA). However, if the employee provides an adequate accounting (i.e., substantiation with receipts or other records) of the expenses incurred, or is “deemed” to have substantiated the amount of expenses under a per diem arrangement, then the reimbursement amounts are excludable from taxable income/wages.
 
Value of personal use of company car
 
This fringe benefit (unless reimbursed by the employee) is subject to FICA, FUTA, FIT, and SIT. However, you may elect not to withhold FIT and SIT 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 or 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 Forms W-2 are distributed. Once elected, the same accounting period generally must be used for all subsequent years with respect to the same automobile and employee.
 
Many companies have moved away from providing company cars in lieu of a cash payment to reimburse the employee for the business use of their personal automobile.  Car allowances paid in cash without any substantiation of business use are fully taxable and subject to all of the tax withholdings of FICA, FUTA, FIT, and SIT.
 
Value of personal use of company aircraft
 
This fringe benefit (unless reimbursed by the employee to the extent permitted under FAA rule) is subject to FICA, FUTA, FITW, and SITW. The value calculated is based on the Standard Industry Fare Level formula provided by the Internal Revenue Service. Expenses related to personal entertainment use by officers, directors and 10 percent or greater owners that are in excess of the value treated as compensation to key employees are nondeductible corporate expenses. Feel free to contact us for assistance calculating the value of the personal use of company aircraft.
 
De minimis benefits
 
De minimis benefit amounts can be excluded when the benefit is of so little value (taking into account the frequency) that accounting for it would be unreasonable or administratively impractical. A common misconception is that if a fringe benefit is less than $25, then it is automatically considered a de minimis benefit. However, there is no statutory authority for this position. If a fringe benefit does not qualify as de minimis, generally the entire amount of the benefit is subject to income and employment taxes (FICA, FUTA, FITW, and SITW). De minimis benefits never include cash, gift cards/certificates or cash equivalent items no matter how little the amount, season tickets to sporting or theater events, use of an employer’s home, apartment, boat, or vacation home, and country club or athletic facility memberships. Gift cards/certificates that cannot be converted to cash and are otherwise a de minimis fringe benefit, which is redeemable for only specific merchandise, such as ham, turkey or other item of similar nominal value, would be excluded from income. However, gift cards/certificates that are redeemable for a significant variety of items are deemed to be cash equivalents. Any portion of such a gift card/certificate redeemed would be included in the employees’ Forms W-2 and subject to income and employment taxes as detailed above.
 
Value of employee achievement awards, gifts and prizes
 
This fringe benefit is subject to FICA, FUTA, FITW, and SITW. In general, employee achievement awards, gifts, and prizes that do not specifically qualify for exclusion are only deductible for the employer up to $25 per person per year, unless the excess is included as taxable compensation for the recipient. Any gifts in excess of $25 per person per year to employees in the form of tangible or intangible property are includable as a taxable fringe benefit for employees. There are two exclusions from the general rule for employee achievement awards:
 
  1. Achievement awards for length of service (must be greater than five years and not awarded to same employee in the prior four years) or safety, each of them being made as part of a meaningful presentation may be excluded from an employee’s taxable income. The exclusion applies only for awards of tangible personal property and is not available for awards of cash, gift cards/certificates, or equivalent items. The exclusion for employee achievement awards is limited to $400 per employee for nonqualified (unwritten and discriminatory plans) or up to $1,600 per employee for qualified plans (written and nondiscriminatory plans).
  2. Certain non-cash achievement awards, such as a gold watch at retirement or nominal birthday gifts, may fall within the exclusion for de minimis benefits.  
 
Value of qualified transportation fringe benefits
 
Qualified commuting and parking amounts provided to the employee by the employer in excess of the monthly statutory limits are subject to FICA, FUTA, FITW, and SITW. For 2016, the statutory limits are $255 per month for qualified parking AND $255 for transit passes and van pooling.   An employee can be provided both benefits for a total of $510 per month tax free with the excess being included in Form W-2. Note that amounts exceeding the limits cannot be excluded as de minimis fringe benefits.
 
Employers can also exclude up to $20 per month for the reimbursement of qualified bicycle commuting expenses, but only for months in which the employee actually commuted to work by bicycle.  This benefit is more restrictive than the transit and parking benefits in that  employees cannot make a pre-tax election to reimburse the expense and employees who receive qualified bicycle commuting reimbursements may not take advantage of any other qualified transportation fringe benefits in that same month.
 
Also, the value of any de minimis transportation benefit provided to an employee can be excluded from Form W-2.  A de minimis transportation benefit is any local transportation benefit provided to an employee that has so little value after taking into account the frequency that accounting for it would be unreasonable.  For example, an occasional taxi fare home for an employee working overtime or departing business dinner may be provided tax free. 
 
Some Local Jurisdictions Require Mass Transit Options
 
The District of Columbia requires employers with 20 or more employees to offer qualified transit benefits.  While D.C. employers are not necessarily required to subsidize the cost of their employee’s commuting expenses under the new law, they are required to provide an arrangement for employees to make a pre-tax election to take full advantage of the maximum statutory limits for transit, commuter highway, or bicycling benefits. San Francisco and New York City have adopted similar laws in an attempt to promote the use of available mass transit options, and to reduce automobile-related traffic and pollution. You should check your local requirements for each employee location.
 
Value of personal use of employer-provided cell phone
 
Since January 1, 2010, employer-provided cell phones are no longer treated as a taxable fringe benefit as long as the cell phone is provided to the employee primarily for noncompensatory business reasons, such as the employer’s need to contact the employee at all times for work-related emergencies, or the need for the employee to be available to speak to clients when the employee is away from the office.  Notice 2011-72 clarifies the exclusion of the cell phone’s value from the employee’s income as a working condition fringe benefit.
 
This change in the law also eliminated the need for the rigorous substantiation of the business use of employer-provided cell phones that were otherwise required for “listed property.”
 
Rules require taxation of certain fringe benefits to 2-percent S corporation shareholders
 
In addition to the adjustments previously discussed, certain otherwise excludable fringe benefit items are required to be included as taxable wages when provided to any 2-percent shareholder of an S corporation. A 2-percent shareholder is any person who owns directly or indirectly on any day during the taxable year more than 2 percent of the outstanding stock or stock possessing more than 2 percent of the total combined voting power. These fringe benefits are generally excluded from income of other employees, but are taxable to 2-percent Scorporation shareholders similar to partners. If these fringe benefits are not included in the shareholder’s Form W-2, then they are not deductible for tax purposes by the S Corporation.  (See Notice 2008-1.) The disallowed deduction creates a mismatch of benefits and expenses among shareholders, with some shareholders 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.
 
These fringe benefits are subject to FITW and SITW only (not FICA or FUTA). These amounts include premiums paid by the S corporation on behalf of a 2-percent shareholder 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. 2-percent shareholders cannot use pre-tax payroll deductions to reimburse premiums paid by the S corporation.
 
Cafeteria plans
 
A 2-percent shareholder is not eligible to participate in a cafeteria plan, nor can the spouse, child, grandchild or parent of a 2-percent shareholder. If a 2-percent shareholder (or any other ineligible participant, such as a partner or nonemployee director) is allowed to participate in a cafeteria plan, the cafeteria plan will lose its tax-qualified status, and the benefits provided will therefore be taxable to all participating employees, therefore nullifying any pretax salary reduction elections to obtain any benefits offered under the plan.
 
Employer contributions into health savings accounts (HSA)
 
This fringe benefit is subject to FITW and SITW only (not FICA 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‑percent shareholders cannot use pre-tax payroll deductions to reimburse HSA contributions paid by the S corporation.  However, these 2 percent owners can take a corresponding above-the-line deduction for the cost of their HSA contributions on their personal tax return.
 
Short-term and long-term disability premiums
 
These fringe benefits are subject to FICA, FUTA, FITW, and SITW.
 
Group-term life insurance coverage
 
All group-term life insurance coverage is treated as taxable, not just coverage in excess of $50,000. The cost of the insurance coverage (i.e., the greater of the cost of the premiums or the Table I rates) is subject to the withholding of FICA taxes only. The cost of the insurance coverage is not subject to FUTA, FITW, or SITW. Please note that you should not include the cost associated with any life insurance coverage for which the corporation is both the owner and beneficiary (e.g., key man life insurance) in the shareholder’s Form W-2.
 
Other taxable fringe benefits
 
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 or services, and meals and lodging furnished for the convenience of the employer must also be included as compensation to 2‑percent shareholders of an S corporation. All of the above fringe benefits are subject to FICA, FUTA, FITW, and SITW.
 
Nontaxable fringe benefits
 
The following fringe benefits are NOT includible in the compensation of 2-percent shareholders 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, de minimis fringe benefits, and on-premises athletic facilities.
 

For more information please contact one of the following practice leaders: 
 
Joan Vines
 
  Rob Kaelber
 

 
Carl Toppin
 
  Paul Cheung
 

 
Alex Lifson
 
  Erica Paul