BGBC Partners, LLP Tax Update: Fringe Benefits
As a business owner, you are well aware that a salary is only one way to compensate your employees. Fringe benefits are another way! But you may not know the general tax rules which apply to fringe benefits. That is the topic of this installment of our Tax Update – how the government taxes fringe benefits.
First, what are some examples of fringe benefits? Examples include: Allowing employees use of a business car to commute to work, health insurance, paid time off, life insurance, and long-term care insurance.
How about the tax treatment of these and other fringe benefits? Well, that is not as straightforward.
In general, fringe benefits must be included in gross income unless specifically excluded by the law. For most of us, we wish it were the other way around. But that is the general rule.
So what type of exclusions are there?
Some of the exclusions are- Employee discount – this is simply a price discount you give your employees. But it doesn’t apply to real estate, stocks or bonds
- Group-term life insurance coverag
- Health Savings Accounts (HSAs)
- Meals
- Moving expense reimbursements
- Working condition benefits – this is where use of a car or cell phone falls.
(See IRS Publication 15-B, section 2 for a complete list of exclusion).
In addition to the above categories, there is also the important requirement that the person who receives the fringe benefit must be an employee (i.e., not an independent contractor or important customer). There are additional rules as to who qualifies and who does not. For instance, an employee who owns more than 2% of the stock in an S-Corporation is not treated as an employee and therefore any fringe benefit they may receive is taxable and included in gross income. The same rule applies to highly compensated employees and certain key employees of the entity.
Most fringe benefits received by a Partner in a partnership level will be treated as guaranteed payment. For example, if the partnership pays its partners health insurance premium, the premium is deducted as an employee benefit expense and is treated as a guaranteed payment to the recipient. Only in a few cases will the fringe benefit to the partners qualify as a non-taxable benefit.
Your employees are the lifeblood of your company, and fringe benefits help boost their morale. However, these benefits are increased if the employees know they don’t have to share the benefits with Uncle Sam. Therefore, consulting a qualified CPA can help you achieve both goals.
