Like many businesses, you may be offering your employees with benefits and perks in addition to their usual pay rate. Today, benefits are no longer an afterthought, but a crucial part of an offer made to a candidate in order to stay competent and maintain a stellar reputation.
That said, an employee benefits plan is only effective when designed right.
One of the crucial tasks of creating and implementing a benefits program is calculating taxes. Some people believe that taxes are not applicable to perks, just salaries and wages—which is not the case.
There are some benefits exempted from the withholding and employment taxes. Identify which are which to avoid any unpleasant surprises at tax time. Here’s a brief breakdown…
Taxable Employee Benefits
Taxable benefits are subjected to similar regulations as gross income, which include social security, federal withholding and Medicare taxes.
Common taxable benefits include:
- Employee bonuses
- The value of a vehicle provided to employees for personal use
- Group life insurance coverage worth a total amount more than $50,000
- Vacation/leave expenses
- Business-use flyer miles (depends on frequency)
Employers can treat taxes for these benefits as paid on a monthly to annual basis. Regardless, of the option, all taxes should be addressed before the last day of the calendar year the benefits were provided (i.e. benefits were deducted from allocated costs). All taxable benefits have to be reported on the W-2 Tax Form.
Nontaxable Fringe Benefits
Federal income tax deductions do not apply to certain benefits. These benefits are excluded from your employees’ gross income. This means that these benefits are also exceptions to social security, federal withholding and Medicare taxes, and are not reported on the W-2 tax form.
Common nontaxable benefits include:
- Employee discounts
- Contributions to flexible spending accounts (FSAs) (not exceeding $2,650)
- Group-term insurance coverage worth a total amount less than $50,000
- Retirement planning solutions
The Internal Revenue Service (IRS) website provides the complete list of nontaxable benefits.
This post is a brief overview of the tax implications on benefits. Employee benefits plans are usually a tricky and tedious process to administer, particularly from the taxation perspective.
As one of the leading employee benefit consultants in Pennsylvania, JS Benefits Group offers complete guidance regarding the tax laws associated with benefits. Our professional advice will help you manage withholding and reporting for taxable benefits.
