Within the American workplace, few things have become as normal and expected as fringe benefits. Ranging from company cars, to covered insurance, to subsidized grocery bills, fringe benefits have been utilized as perks to retain employees for decades. While the examples of fringe benefits have transformed over the decades, they remain an instrumental piece of the traditional compensation package and payroll process.
Although different from a standard salary, fringe benefits are required to be listed on end-of-year reports, such as Form W-2’s. Whether by design or by accident, this reporting process can be daunting for companies – especially smaller ones with little professional accounting experience.
To help improve the reporting process, this article will define what fringe benefits are and give an overview of common policies. In addition to defining these policies, we will explain key points that every business should know.
What Are Fringe Benefits?
A fringe benefit is any benefit that supplements an employee’s salary. In America, these benefits are traditionally health insurance, subsidized meals, company perks, and more. The value of any personal use benefits, even as minimal as company cars, must be included on Form W-2. A fringe benefit includes any taxable benefit, whether it is cash or non-cash.
Fringe benefits must be reported before the final payroll of the year. Reporting taxable benefits allows the appropriate withholding taxes to be deducted from the employee’s check. In the case that these benefits were processed without wages, companies may be required to pay the employee’s portion of Social Security and Medicare taxes.
If any part of an employee’s income tax or FICA withholding is covered by your company, the amount must be reported as additional taxable wages for the employee – often referred to as “grossing up.” Additional employment taxes, for both employee and employers, are required to be withheld from this added income.
While perks are generally the benefits we think of, there are plenty of other common policies. Below we will outline a few common fringe benefits, as well as note key points your company should know when filing your end of year report:
Group-Term Life Insurance
Group-term life insurance is fringe benefit that provides coverage to multiple individuals, not just the employee. Fittingly, group-term life insurance is most commonly used by companies that hire groups of employees.
Group-term life insurance in excess of $50,000 should be reported before your last payroll of the year. The IRS assigns a value for each $1,000 of excess coverage per month, with respect to the employee’s age.
While the IRS does have a published table, the best way to determine your company’s policy value is with the assistance of an accounting professional.
Dependent Care Assistance
Dependent Care Assistance is a fringe benefit that allows companies to provide assistance for care of qualifying dependents. To qualify, dependents must be under the age of 12 and/or be physically or mentally incapable of self-care. Additionally, the dependent must spend over 8 hours per day in the employee’s care. This cost is regularly used to subsidize child care, allowing the employee to work and advance their education.
On their Form W-2, employers are required to list the total amount of dependent care benefits paid or incurred for each employee – including any amount that exceeds the $10,500 exclusion. This value should be listed in Box 10 of the Form W-2.
If your company has provided dependent care services through an employer-sponsored program before the final payroll of the year, these benefits should be reported as paid or furnished.
Health and Accident Insurance Premiums Paid by an S Corporation
An S Corporation is a business that passes its corporate income, losses, deductions, and credits directly to its shareholders. This decision is made for federal tax purposes and allows companies to avoid double taxation on corporate income. According to the IRS, S Corporations must be domestically owned, have only allowable shareholders, and have under 100 shareholders.
As compensation paid to the shareholder/employee, S corporations deduct the premiums they pay for accident and health insurance to cover 2% of shareholder/employee compensation. The premiums are a part of the shareholder/employee's salary and reported on their individual W-2 form.
If your company paid health and accident insurance premiums for any employee then you must report the plan by the final payroll of the year.
In regards to health and accident insurance premiums for shareholder and employees, the IRS outlines two specific tax treatments:
1. Non-Discriminatory Plan
In the case that premiums are paid under a plan for employees and dependents, the plan is considered a non-discriminatory plan. Non-discriminatory plans can be used for individual employees or a class of employees.
In either case, the following occurs when S Corporations use non-discriminatory plans:
- The premiums are considered as exempt for FICA and FUTA.
- The premiums are included in the shareholder/employee’s federal gross income.
Under a non-discriminatory plan, premiums are reported on Form W-2 in Box 1 (Wages, Tips, Other Compensation).
2. Discriminatory Plan
If premiums are not paid under such plans, then a corporation is utilizing a discriminatory plan. Under a discriminatory plan, the following occurs:
- The premiums are treated like normal compensation and subject to FICA and FUTA.
- The premiums are included in the shareholder/employee’s gross income.
Under a discriminatory plan, the premiums are reported three times on Form W-2s: in Box 1 (Wages, Tips, Other Compensation), Box 3 (Social Security Wages), and Box 5 (Medicare Wages and Tips).
Educational Assistance Program
The Educational Assistance Program is an employee benefit in which an employer covers tuition costs for an advanced education program. This benefit can be applied through direct tuition coverage, or through assistance in loan repayment, scholarship procurement, and more.
Qualified under a Section 127 plan for 2020, the exclusion for employer-provided educational assistance is $5,250, as long as the courses are non-job related – the courses can be undergraduate or graduate level. Additionally, job-related education reimbursements are exempt from taxation and withholding, as long as they qualify as a working condition fringe benefit.
Reimbursements must be reported before the final payroll of the year.
Report Fringe Benefits with Confidence
Whether you are attempting your year-end process for the first time or are an accounting veteran, the process of end of year reporting can be daunting. While it sounds cliché, the best way to confidently submit your end-of-year reports is through education and assistance.
What is needed to ensure successful reporting will differ by person and company, and is dependent on previous experience and knowledge.
As a part of CAVU’s mission to empower its community, we have designed a myriad of resources to help make navigating end-of-year reporting easier. In addition to this article, CAVU has created an entire resource library for end-of-year reporting and all other payroll needs. We also highly recommend referring to our 2022 Year-End Guide, as well as our blog.
In addition to our expertly curated resources, CAVU offers a Payroll Guide for each of its customers. Payroll Guides are assigned directly to an account, allowing them to be knowledgeable on your company’s details, goals, and needs. In addition to being direct points of contact, our team members assist companies in ensuring timely and compliant payroll reporting.
To learn more about how our offerings will change the way you report, please feel free contact us at (855) 265-CAVU (2288) or email us at firstname.lastname@example.org.