A fringe-benefit is non-monetary compensation for work. The business can offer fringe benefits to employees, independent contractors, partners, and even owners.
Some fringe benefits are taxable to the recipient, but many have tax advantages over monetary compensation. Fringe benefits may be tax-exempt or partially tax-exempt, or taxes may differ. Some fringe benefits, such as health insurance, may also be exempt from employment taxes. Certain fringe benefits can also offer low costs, even taxable, by taking advantage of group rates, such as life insurance, with an advantage of more than $ 50,000.
The taxation of fringe benefits also depends on the entity providing them. The owners of a pass-through entity or sole proprietorship, including 2% of the S Corps shareholders, are not considered employees so that they can benefit from it. Still, they do not benefit from the tax advantages that they can have for rank-and-file employees. While a partnership can offer the fringe benefits with tax breaks, sole proprietorship, limited liability company, or S corps to its employees, C corps can offer many other benefits that have tax advantages that are not available to other entities. Owners of a C company can receive the same benefits with the same tax benefits as those offered to rank-and-file employees.
Tax Treatments on Fringe Benefits
There are meals, Health coverage, Life insurance, Parking fees, public transit cards, Flexible expense accounts, and Even cell phones provided by the employer. I bet you're getting some added benefit from your employer on top of your salary.
But, do you know what fringe benefits the IRS considers taxable? Which benefits are also subject to labor taxes? And how do the fringe benefits affect the estimated taxes?
This can be incredibly confusing at the best of times and is especially complicated for partners, LLC members, and some shareholders.
But if you usually don't understand how your fringe benefits are taxed, it's hard to know what you're making and paying in taxes. It also complicates tax planning and calculating estimated payments or deductions.
Fringe benefits are forms of remuneration (in addition to wages or salaries) provided for services provision. As a general rule, fringe benefits are taxable and should be recorded as income, unless the benefit is paid or the law specifically excludes such tax treatment. Taxable benefits may also be subject to income tax, social security, and Medicare source deductions.
The reporting requirements and tax implications associated with fringe benefits vary depending on the benefit and the type of person receiving the benefit, such as an employee, partner, member, or shareholder. The rules are particularly complicated for the following:
LLC members that are taxed as partnerships
Partners in Partnership
Shareholders of S Corps who own more than 2% of the shares of the company
If you are a shareholder of an S corps, as described above, your fringe benefits are generally considered to be fringe compensation for income and employment tax purposes and are reported in W-2.
If you are a partner in a partnership or a member of an LLC, the fringe benefits are generally considered guaranteed payments or other compensation for income tax and self-employment and are reflected in the K-1 program.
Of course, there are exclusions to the general rules: some fringe benefits are not subject to fees for partners, LLC members, or two percent S Corps shareholders. Instead, they get the same beneficial tax treatment as employees.
The following shows the common fringe benefits that are generally subject to tax.
Fringe benefits subject to tax
Benefits of adoption assistance
Dependent care benefits, up to $ 5,000 per year
Educational benefits through skilled care programs, up to $ 5,250 per year
Employer Contribution to Flexible Spending Agreements (FSAs)
Employer contributions to health savings accounts (HSAs)
Group life insurance coverage, 100%
Health benefits: medical, dental, vision, accidents.
Qualified advantages in terms of transport and parking
Reimbursements of eligible mobile expenses
It is important to note that the favorable tax treatment for many of these benefits is subject to limits or other requirements. In particular, certain benefits must be provided in a "responsible plan." This means that the employee, partner, or shareholder, must report the expenses and the income to be reimbursed.
Fringe Benefits, not subject to taxes
Benefits of minimum value (minimis), excluding cash and gift vouchers
Employee discounts
In local sports facilities, owned or rented
Lodging on business premises
Meals in commercial spaces provided for the convenience of the employer
Minimum value meals
Mobile phones provided for noncompensatory business reasons
Pension planning services, according to the employer's qualified plan
Services provided at no extra cost to the employer
Working conditions benefits
The rules for taxing fringe benefits are particularly complex and include many exceptions. If you have any questions on how this affects you or your business, call to discuss your specific situation.
