Generally, your company is not required to withhold taxes on non-taxable fringe benefits. Because employees do not have to pay FICA or income tax on non-taxable fringe benefits. However, non-cash taxable fringe benefits are adifferent story. The non-cash taxable fringe benefits:
- Should be reported to the IRS
- Are subject to withholding of payroll and income taxes
Tax Law Provides Employers With Some Flexibility
The tax law gives employers some flexibility in this area. Here are the basic rules of this flexibility:
- The company may withhold taxes on non-cash taxable fringe benefits during its regular interval or regular pay period. You do not have to inform the IRS of the use of the pay periods. A single benefit can be treated as paid throughout the calendar year.
- You can use different pay dates for different types of fringe benefits. You do not have to choose the same pay period for all the employees.
- Employers can choose between different withholding methods. You can add the value of fringe benefits for a payroll period to the wages. So, you can use the regular withholding tables. The benefit can be considered an additional pay benefit with a flat withholding rate of 25%.
- Generally, you must estimate the value of non-cash taxable fringe benefits by January 31 of the following year. Before January 31, you can determine the value of the benefits to deposit and withhold on time.
What is the Special Accounting Rule?
All benefits provided during the year are treated as paid by December 31. But, the tax law allows you to use a special deadline of October 31 for withholding purposes. This special rule cannot be used for fringe benefits, which includes:
- The value reported for group-term life insurance
- Transfer of an investment property or real estate
You can treat benefits provided by employers in November and December as if you received them in the following year. This special rule can be elected for specific non-cash taxable fringe benefits. In all cases, employers must inform employees properly if the election is made.
Note: You cannot withhold all benefits treated as paid in the last two months of a year until the following year. However, only the value of the benefits provided in the final two months of the calendar year can be treated as paid in the following year.
Overestimating And Underestimating
You may be fined if you:
- Deposit less amount
- Underestimate the value of fringe benefits
If you deposit too much and overestimate the value of the fringe benefits, you can either:
- Claim a refund
- Have overpayment applied to the next Form 941
The taxation of fringe benefits can be complicated. Make sure your withholding methods coordinate with the Form W-2s issued to the employees for the tax year.
Different Types Of Fringe Benefits
1. Non-taxable fringe benefits
Non-taxable fringe benefits do not need to be included in wages if an Internal Revenue Code (IRC) section excludes them. For example, medical care premiums are not taxable for employees because they are excluded under IRC section 106.
2. Taxable fringe benefits
Taxable fringe benefits are included in the gross income unless the IRC section excludes them. Fringe benefits may contain:
- Services
- Property
- Cash and cash equivalents
For example, bonuses are always taxable because no IRC section exempts them.
3. Deferred taxation fringe benefits
Deferred taxation fringe benefits involve the employer's contributions to an employee's pension plan. These benefits might not be taxable when made. But, the distributions might be taxable when used by the retired employee.
4. Partially taxable fringe benefits
Partially taxable fringe benefits exclude a part of the value from taxation. For example, parking benefits or public transportation subsidies are not taxable up to specific dollar limits.
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