Professional Service Employers Must Adhere to Fringe Benefit Taxation Rules

March 3, 2020
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Professional service providers offering positions to potential new hires are usually quick to point out the fringe benefits the employee will receive in addition to an annual salary or hourly wages. And with good reason: This form of pay can add up to a significant dollar amount – and much of it is not taxable.

Generally, the IRS considers fringe benefits to be taxable income to your employees. However, there are many exceptions which can be excluded from a variety of Federal taxes, including social security, Medicare, federal unemployment (FUTA) tax, or Railroad Retirement Tax Act (RRTA) taxes.

Common Fringe Benefits

If you’re a professional service provider, you know what the most commonly excluded fringe benefits are. You may offer accident and health benefits to employees, as well as group term life insurance. You might provide health savings accounts (HSAs), educational assistance, or transportation (commuting) benefits. Cell phones used primarily for business purposes have become popular fringe benefits as well.

Generally, you won’t be reporting the value of these on a W-2. But as is typical with IRS regulations, there are often exceptions and limits to its exclusion rules. For example, educational assistance is exempt only up to $5,250 annually. If they are provided through a flexible spending arrangement (FSA) or something similar, long-term care benefits are not exempt.

There are also limits on transportation benefits (like transit passes or qualified parking), and there are exceptions to those exceptions. Some excluded benefits don’t apply to S corporation employees who are 2 percent shareholders, or to “certain highly compensated employees.”

It’s complicated. We can help here.

Less Common Fringe Benefits

There are numerous other fringe benefits that are either completely or partially exempt from income taxes and/or other withholding. These include:

  • Retirement planning services (doesn’t apply to legal, accounting, brokerage, or tax preparation).
  • Employee discounts, up to limits.
  • Athletic facilities (if operated by the employer on property owned or leased by employer).
  • Dependent care assistance of up to $5,000 ($2,500 if married employee filing separate return).
  • Adoption assistance (income tax withholding is excluded).

What’s New for 2020?

The IRS has implemented related changes that will affect 2020 income taxes. Here’s what you will see:

  • Employees can be reimbursed 57.5 cents-per-mile for business use of a personal vehicle.
  • Employees on cafeteria plans will not be able to ask for salary reduction contributions for health FSAs that exceed $2,750.
  • Employers will file the new Form 1099-NEC instead of the 1099-MISC to report nonemployee compensation.

Generous fringe benefits can help your business to attract top talent. But the rules regarding taxation of such extras can be complicated. You don’t want to promise benefits to prospective hires, only to discover that you can’t come through with them. We can help ensure that this doesn’t happen to you. Contact us, and we’ll set up a consultation.

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