With the year soon coming to an end, it’s time to think about year-end tax compliance, including W-2 reporting. While your outside payroll provider can report usual salary and wages without any issues, we often see errors in which employers don’t provide the W-2 preparer with taxable non-cash fringe benefits. Fringe benefits must be computed and included in employees’ wages prior to December 31 in order to allow for the timely withholding and depositing of payroll taxes.
Who does this apply to?
Fringe benefits are forms of pay (other than money for the performance of services by employees) that are considered taxable income for that employee, unless specifically excluded by law. Certain taxable fringe benefits affect all employees while other taxable fringe benefits may only affect partners in a partnership or LLC, or more than two-percent shareholders in an S corporation.
What are the 3 most commonly missed fringe benefits on a W-2?
#1 Value of the personal use of a company car
The value of a company car used for personal travel must be included in the employee’s gross income as wages subject to FICA. This taxable fringe benefit applies to all employees with a company car. Be sure to request personal and total mileage from the individual so that the payroll provider can compute the taxable fringe benefit.
#2 Insurance premiums for health, dental, or vision
Most employees’ insurance coverage is a tax-free fringe benefit. However, health, dental, or vision insurance premiums paid on behalf of a partner or paid by the S Corporation on behalf of the two-percent shareholder is taxable for income tax purposes. These fringe benefits are only subject to federal income tax withholding (FITW) and state income tax withholding (SITW) and not FICA or FUTA. As insurance premiums may not be handled by the W-2 preparer, it’s up to the employer to ensure that this information is provided to the preparer for proper inclusion.
#3 Group-term life insurance
Employees are eligible to receive the first $50,000 of group life insurance coverage on a tax-free basis. Coverage in excess of $50,000 is taxable. For partners or two-percent S corporation shareholders the cost of all group-term life insurance coverage provided must be included in taxable wages.
The computation of the taxable benefit depends on the extent of coverage as well as the age of the insured. This fringe benefit is subject to FICA, however excluded from FITW, FUTA, and SITW. Please note that any life insurance coverage for which the corporation is both the owner and beneficiary does not meet the definition of group-term life insurance and therefore there is no income inclusion in the shareholder’s wages.
Unfortunately, year-end payroll reporting is not straightforward. There are different rules based on ownership status or the type of fringe benefits provided. Additionally, the computation of these taxable fringe benefits is the responsibility of the employer which is often why they become overlooked. If you have any questions or need assistance with your 2020 fringe benefits, please do not hesitate to contact us.
Please note that this blog is based on tax laws effective in November 2020, and may not contain later amendments. Please contact Cray Kaiser for most recent information.