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Taxable Benefits You May Want to Offer in a Tight Labor Market

You may already know that offering benefits is a critical part of employee retention, but what are the tax implications? Barbara Weltman outlines some key considerations.
taxable benefits in competitive labor markets

HR leaders often find that effective recruitment and employee retention are among their and their teams’ top challenges. In fact, the 2018 Paychex Pulse of HR Survey found that hiring-specific challenges abound, including finding quality candidates who not only fit company culture, but who are also willing to stay with the organization.

Given these types of challenges, how can you retain valued workers and attract new ones? While salary and bonuses are mainstays, you should also consider offering various fringe benefits, even if they entail tax costs to employees and the company.

How valuable is a taxable fringe benefit?

If you offer a taxable fringe benefit to an employee, there is still considerable value added from the offer. The cost to the employee for receiving a taxable benefit is considerably less than what it would cost the employee to pay out of pocket for it. For example, say you pay $1,000 toward an employee's student loan debt. If the employee is in the 22 percent tax bracket, this benefit costs the employee $220 in income taxes and $76.50 in Federal Insurance Contributions Act (FICA) taxes, or a total of $296.50. If the employee wanted to pay the same $1,000 out of pocket, they would have to earn an additional $1,425 to come out the same.

Which fringe benefits should a business offer?

Despite the income tax cost to employees (and the added payroll tax cost to employers), companies may want to offer certain taxable fringe benefits. Because the fringe benefits are taxable, your offering is limited only by your imagination and your budget. Here are some of the taxable benefits you might want to consider:

  • Student loan repayment assistance. This benefit can be particularly attractive for younger workers such as those in the millennial generation. Note: There is legislation pending that would transform some employer assistance into a tax-free fringe benefit.
  • Moving expenses. Because the cost of assistance to employees who relocate is no longer tax-free to employees or deductible by employers, any assistance you choose to offer to defray the cost of moving household items is considered additional taxable compensation.
  • Commuter benefits. Employers cannot deduct the cost of free parking, transit passes, or vanpooling, but employees can receive these benefits tax-free up to $265 per month in 2019. This means the benefits are not subject to payroll taxes. For 2018 through 2025, the former tax-free monthly amount of $20 ($240 per year) for bicycle commuting is not tax-free (except where necessary for the employee's safety).
  • Excess mileage reimbursements. If you reimburse employees for driving their personal vehicles on company business under an accountable plan using the IRS rate but pay the employee more than the rate, the excess amount is taxable. For example, in 2019 when the IRS rate is 58 cents per mile, if you reimburse the employee at the rate of 60 cents per mile, then each mile triggers two cents of taxable compensation to the employee.
  • Education assistance over the $5,250 annual limit. If you have a nondiscriminatory education assistance plan and cover more than $5,250 of an employee's costs that aren't job-related, the excess is taxable to the employee.
  • Personal use of a company vehicle. There are a variety of ways to figure the taxable amount of this fringe benefit; see IRS Publication 15-B.

Payroll costs

Because these benefits are taxable compensation to employees (other than where noted), they are subject to payroll taxes. For example, there's a 7.65 percent FICA cost to employers on these benefits. Be sure to factor in any state-level payroll costs (e.g., unemployment tax, workers’ compensation, etc.).

If the taxable fringe benefits are merely cash payments, then lump the payments in with regular compensation and withhold accordingly. If the taxable fringe benefits are not in cash (e.g., personal use of a company vehicle), then special rules come into play that provide you with considerable flexibility in handling payroll taxes.

You can treat taxable non-cash fringe benefits as paid on a pay period, quarter, semiannual, annual, or other basis, as long as they're treated as paid no less frequently than annually. You don't have to choose the same period for all employees; you can withhold more frequently for some employees than for others. You can also change the period as often as you want or need to do, as long as you treat all of the benefits provided in a calendar year as paid no later than Dec. 31.

You can even treat the value of a single fringe benefit as paid on one or more dates in the same calendar year, even if the employee receives the entire benefit at one time. You don't have to notify the IRS of the use of different pay periods.

Example: Your employee receives a fringe benefit valued at $1,000 in one pay period during 2019. You can treat it as made in four payments of $250, each in a different pay period of 2019.

When it comes to withholding on non-cash fringe benefits, which are viewed as supplemental wages, you have a choice:

  • Withhold income taxes at a flat 22 percent rate (a 37 percent rate applies only when supplemental wage payments to an employee exceed $1 million in the year).
  • Add the value of the supplemental wages to regular compensation and then figure withholding on the total amount.

You also have to withhold FICA on supplemental wages.

Before you start expanding your menu of benefits, consider surveying employees to learn what they really want. It may turn out that benefits such as a flexible work schedule, which is no cost you or your staff, is particularly valuable to them.

barbara weltman
Barbara Weltman is a tax and business attorney and the author of J.K. Lasser's Tax Deductions for Small Business as well as 25 other small business books.
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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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