Providing new perks or benefits without realizing that they're likely taxable can cause tax problems down the road, for employees and employers.
With the COVID-19 pandemic forcing major changes around where and how employees work, employers are modifying their benefits to meet changing needs and to maximize engagement with a remote and scattered workforce.
New perks create new issues
New perks for challenging times, such as sending employees lunch for video meetings and offering remote workers virtual sessions with a personal trainer to replace the workplace gym may seem like good enticements right now. However, depending on the value of those extras and their frequency, employers might be establishing taxable benefits for employees without realizing it. This is particularly true when employers offer benefits on an "as-needed" basis.
Are those benefits considered "fringe", or not
Now that work-from-home situations and other workforce changes have become fairly routine, employers may want to make it a point to determine whether these new benefits are a normal business expense or a "fringe" benefit and whether there's a tax liability – for employers and employees. (It should be noted that while employer-sponsored benefits are now key to employees' rewards and no longer on the fringe, the IRS still uses the phrase "fringe benefits" in discussing benefits' tax status.)
Depending on the circumstances, providing a taxable benefit to employees without recognizing or reporting it as such, particularly over a long period of time, could cause problems for both employers and employees. The value of taxable benefits must be included in each employee's taxable income and is subject to normal employment tax withholding.
Avoid problems – especially across your entire workforce
A mistake in determining whether a fringe benefit is taxable will cause the employee's income to be understated, possibly leading to underpaid taxes. This may cause minimal problems for individual employees receiving benefits with a modest monetary value. However, if the same error is multiplied across an entire workforce, it could be a substantial problem for the employer and include penalties for failing to withhold the employment taxes and report employees' taxable income. The employer could also be liable for income and employment taxes that were not withheld. That's a lot to endure for some well-meaning benefits.
You want to correct things before the end of the year
There is still time to resolve these matters. Employers do have time to address any errors in the classification of these benefits and expenses before the end of the tax year. Working with their tax and legal advisors, employers can still include taxable benefits in employees' wages and file the paperwork necessary to address underreported taxes.
When addressing unreported non-cash benefits, employers can elect to treat such fringes as paid on a pay period, quarterly, annual, or other basis, as long as they treat them as paid at least annually and not later than Dec. 31. No formal election is required, and employers aren't required to notify the IRS about the method they want to use. For example, if an employer realizes that certain non-cash fringe benefits are taxable, these rules allow employers to include the value of the benefit in employees' wages and withhold any employment taxes at any point before the end of the year.
My Tax Problem Solver Team and I can definitely advise you whether a particular benefits situation is taxable or not, and we can definitely tell you what will work to your advantage, and how to avoid tax problems when providing new benefits. So give us a call if you have any questions or issues needing attention! Email me at Larry@TaxProblemSolver.com or call me at (855) 688-4779. We're always here for you! Click here for a free consultation!
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