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, it appears as if the employee received one large lump sum payment. This puts the employee in a higher tax bracket for that final payroll of the year, which 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 an employee is paid $1,000 per week, and their employer waited until the end of the year to record $15,000 worth of health benefits that were paid throughout the year. It will appear as if 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 could have been prevented by deducting the benefits throughout the year vs in one lump sum on the final payroll 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 an employee would be taxed for $1,000 + $288.47 per pay period for the remainder of the year, effectively falling into a lower tax bracket.
It is in an employer’s 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 employees. At the same time, not reporting them at all can result in penalties and sanctions to businesses on behalf of the IRS.
In addition, waiting until after year-end to report fringe benefits means businesses may owe money when filing their tax returns and may be charged an underpayment penalty.
We can help!
Thankfully, you’re not alone! UniqueHR has been helping businesses manage and stay compliant in all areas pertaining to human resources, including payroll, since 1994. We take care of your HR back-office tasks, so you can focus on daily operations. Contact us now at (361) 852-6392 or find us online at UniqueHR.com to see how we can help.
