Why acting early may save you money and risk.
What are non-cash fringe benefits?
Non-cash fringe benefits are benefits an employee doesn’t receive cash for but does get taxed on. Some examples of commonly used fringe benefits are gift cards, Group Term Life Insurance greater than $50,000, personal use of a company vehicle, or health insurance premiums for 2% shareholder employees of S-Corps.
When should employers record fringe benefits in their payroll?
It is critical for fringe benefits to be recorded as frequently as possible. If employers wait until the end of the year to record fringe benefits that were actually paid throughout the year, your payroll software thinks the employee received one large lump sum payment. This puts the employee in a higher tax bracket for that final payroll of the year. This means more taxes off their paycheck and, worst case scenario, potentially negating their check altogether.
What does this look like in real life?
Let’s say your employee gets paid $1,000 a week, and you waited until the end of the year to record $15,000 worth of health benefits that were actually paid throughout the year. To your payroll software it looks like they’ve been paid $16,000 in one paycheck, which is going to put them in a higher tax bracket potentially taking their $1,000 weekly pay down to zero. This leaves you with a lot of explaining to do to your now rightfully upset employee.
This issue would have been avoided by taking the health benefits pay and immediately after they went into effect you divided the total amount between the remaining pay periods of the year. This would have led to slightly smaller paychecks throughout the year, and therefore a tax liability that is spread out evenly.
$15,000 Non-cash fringe benefits / 52 pay periods after payout = $288.47
This means your employee would be taxed for $1,000 + $288.47 per pay period for the remainder of the year, falling into a much lower tax bracket than $16,000.
Clearly, it’s in your best interest to record all fringe benefits as early and as frequently as possible regardless of the type of benefit.
But wait, there’s more.
Failure to report fringe benefits on a timely basis can result in W2 corrections due to underreported wages for your employees. At the same time, not reporting them at all can result in penalties and sanctions to your business on behalf of the IRS. In addition, waiting until after year-end to report fringe benefits means you may owe money when you file your tax return and may be charged an underpayment penalty.
We can help!
Thankfully, you’re not alone! UniqueHR has been helping businesses manage and stay compliant with all things pertaining to human resources, including payroll, since 1991. We take care of your HR activities, so you can focus on the activities that will grow your bottom line. Contact us now at (361) 852-6392 to see how we can help.
