Year End Considerations - Fringe Benefits, Special Treatment for More Than 2% Shareholders, Changes
As 2018 draws to a close, we remind you about the proper inclusion of common fringe benefits in an employee’s and/or two-percent shareholder’s taxable wages, as well as changes made under the 2017 tax reform, referred to as the Tax Cuts and Jobs Act (TCJA). Fringe benefits are defined as a form of pay for performance of services given by a company to its employees as a benefit and 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 information regarding the identification and tax reporting for several fringe benefits that are customarily provided. The TCJA changed the treatment of several fringe benefits as discussed below. Common Taxable Employee Fringe Benefits
Employer-paid group-term life insurance coverage in excess of $50,000 Group-term life insurance coverage in excess of $50,000 is subject to FICA withholding but still excluded from federal income tax (FIT). 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, are considered taxable wages for federal and state tax purposes. Value of personal use of company car The value of the company car used for personal travel must be treated as additional wages and subject to regular payroll taxes FICA and FIT. 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 FICA, FUTA, FIT, and SIT withholdings. Meals furnished by employers to employees often exceed the requirements for exclusion as de minimis. Still, most employer-provided meals are excluded from the employees’ taxable income under the accountable plan rules for working condition fringe benefits. The TCJA did not change the rules of taxation of meals to employees, even though the limitations on an employer’s deduction of meals and entertainment were modified. Under the new rules, food and beverage satisfying the de minimis fringe benefit rule and quiet business meals with customers and clients are 50-percent deductible by employers. Food or beverage expenses related to employee recreation, such as holiday parties or annual picnics, remain 100-percent deductible when provided primarily for the benefit of rank and file employees. Entertainment expenses, even with a business purpose, are no longer deductible under the TCJA. Job-related moving expenses paid by employer Moving expenses incurred during 2018 must be included in the employee’s taxable compensation under the TCJA changes, unless the employee is a member of the U.S. Armed Forces on active duty, whose move is to a permanent change of station. The exclusion from employee income will be reinstated January 1, 2026. Value of qualified transportation fringe benefits One of the most significant changes to fringe benefits in the TCJA is the elimination of any employer deduction for expenses incurred in providing any transportation fringe benefits to employees. Transportation fringe benefits may still be provided to employees, and the payroll tax treatment of employee parking, van pool, and transportation benefits remains unchanged. Qualified commuting and parking amounts provided to the employee by the employer in excess of the monthly statutory limits are subject to FICA, FUTA, FIT. For 2018, the statutory limits are $260 per month for qualified parking and $260 for transit passes and van pooling. An employee can be provided both benefits for a total of $520 per month, tax-free, with the excess included in Form W-2. Note that amounts exceeding the limits cannot be excluded as de minimis fringe benefits. Under the TCJA, bicycle commuting benefits incurred on or after January 1, 2018, are included in taxable wages subject to payroll taxes. The taxation to the employee as regular compensation sustains the deduction by the employer. Prior to the TCJA, $20 per month could be provided by employers to bicycle commuters, excluded from the employee’s taxable income and deducted by the employer. The value of any de minimis transportation benefit provided to an employee can be excluded from Form W-2. For example, an occasional taxi fare home for an employee working overtime or departing a business function such as a holiday party may be provided tax-free. Cell phone without business reason 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.” Employer expenses related to cell phones provided to an employee that does not have a business reason for being in contact at all times for work-related emergencies or to speak to clients when away from the office, should be included in the employee’s taxable income.
Rules require taxation of certain employee fringe benefits to two-percent S corporation shareholders
A two-percent shareholder is any person who owns, directly or indirectly, on any day during the taxable year, more than two percent of the outstanding stock . Fringe benefits are generally excluded from the income of other employees, but are taxable to two-percent S corporation 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. 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 two-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. Two-percent shareholders cannot use pre-tax payroll deductions to reimburse premiums paid by the S corporation. Cafeteria plans A two-percent shareholder is not eligible to participate in a cafeteria plan, nor can the spouse, child, grandchild, or parent of a two-percent shareholder. If a two-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 to health savings accounts and other tax favored health plans This fringe benefit is subject to FITW and SITW only (not FICA or FUTA). If the shareholder partially reimburses the S corporation for the health plan contribution, using post-tax payroll deductions, the net amount of the contribution must be included in the shareholder’s compensation. Two-percent shareholders cannot use pre-tax payroll deductions to reimburse plan contributions paid by the S corporation. However, these two-percent owners can take a corresponding above-the-line deduction for the cost of their health plan 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 These payments should be included in line 1 of a greater than two-percent shareholder’s W-2, subject to regular federal withholding. This additional compensation is also subject to employment tax withholding (FICA and FUTA). The entire premium paid on behalf of a two-percent shareholder under a group-term life insurance policy is treated as taxable, not just the premium for 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 FICA tax withholding only. The cost of the insurance coverage is not subject to FUTA, FITW, or SITW. Please note that any life insurance coverage for which the corporation is both the owner and beneficiary (e.g., key man life insurance) does not meet the definition of group-term life insurance and therefore there is no income inclusion 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, 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 two-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 two-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.