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Payroll Tax On Fringe Benefits

Benefit #6 Fringe Benefits Can Improve Employee Wellbeing

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Fringe benefits can be a powerful and effective tool to change the culture and health of a business from the inside out.

Many of the most common options for fringe benefits can directly lead to a workplace culture thats healthier, happier, and wellbeing-focused for employees, which can help them be more productive in the workplace day-to-day.

Some fringe benefits that can improve employee wellbeing could include access to a gym or health centre or passes to specific classes or courses to improve health.

Private health insurance can also allow employees access to faster care, improving their overall wellbeing and offering access to additional health and nutrition services as needed.

What Are Some Taxable Fringe Benefits

Any fringe benefit offered as a bonus to an employee from an employer is considered taxable income unless it falls under a specific list of excluded benefits as determined by the IRS. Taxable fringe benefits must be included on an employees W-2 each year, and the fair market value of the bonus is subject to withholding.

The most common fringe benefits considered a taxable part of total compensation include reimbursement for mileage expenses that exceed the limitations provided by IRS guidelines and reimbursement of education or tuition expenses that are not directly related to job performance or are more than the stated IRS limits. In addition, a bonus that falls under the category of working conditions benefit, such as a mobile phone or company car, can be considered taxable if used outside of business.

For taxpayers claiming a mileage deduction, the 2022 IRS standard mileage rate for business use is 58.5 cents per mile. Any amount exceeding this limit is considered taxable as income. For example, if a company reimburses its employee 65 cents per mile, then 6.5 cents per mile is taxable.

Except for certain active-duty military personnel, the Tax Cuts and Jobs Act eliminated the moving expenses exclusion for taxpayers from 2017 to 2026.

Annually, employers can exclude up to $5,250 from an employee’s wages for education-related assistance provided that assistance was provided under a qualifying program. Amounts exceeding this threshold are taxable as ordinary income.

What Are Taxable Fringe Benefits

Employers can provide their employees with a variety of desirable benefits however, it is important to know which ones are subject to taxes and which benefits are not. Unless otherwise stated by the Internal Revenue Code, an employee fringe benefit is likely taxable to some extent.

Most fringe benefits come in the form of a product or service, as opposed to a cash payment, so they are taxed on their cash-value equivalent based on fair market value.

This equivalent value is taxable, just like how cash compensation is taxable, except that the employee typically enjoys the benefit in the form of a product, service or reimbursement, said Moses Balian, HR consulting manager at Justworks.

Some of the most common taxable fringe benefits, according to Balian, are:

  • Lodging and meals
  • Retirement planning services
  • Qualified employee discounts
  • Qualified transportation benefits, also known as commuter benefits
  • No additional cost services

Employers can also take advantage of an affordable, nontaxable fringe benefit option: de minimis benefit. These are benefits with a value so minute that the IRS deems accounting for them to be unreasonable or administratively impractical.

De La Nuez said common fringe benefits that fall into this category can include office snacks or drinks, group meals, birthday or holiday gifts , employer-provided local transportation, personal use of a business cell phone, and theater or sporting event tickets.

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Calculating The Fringe Benefits Value

The taxable value of WA fringe benefits for payroll tax is the total of the Type 1 and Type 2 WA fringe benefits pre-grossed-up amount, less remote area exemption, multiplied by the Type 2 gross-up rate.

The fringe benefit tax year is from 1 April to 31 March, but for payroll tax purposes you can apply the Type 2 gross-up rate from 1 July to 30 June.

Fringe Benefits Are Taxable With Exceptions

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As an employer, are you aware of what counts as reportable fringe benefits? Its important to know that nearly all fringe benefits are taxable. The value of a fringe benefit is subject to a number of taxes, including federal income tax, Social Security tax, Medicare tax, and FUTA. The value of a fringe benefit must also be included in Boxes 1, 3, and 5 of Form W-2, and on line 3 of Form 940.

That said, its also key for employers to know that the taxable portion of a fringe benefit may be reduced by the following amounts:

  • Any amount that the law excludes from compensation, such as low-cost holiday gifts or achievement awards and

  • Any amount that the recipient pays for the benefit.

It would be a mistake to assume that a fringe benefit may not be taxable just because it isnt specifically listed anywhere in the tax law, or in one of the IRS publications. Typically, the only fringe benefits that are specifically discussed in the tax laws are those that might be excluded from income, either in whole or in part.

Any or all of a fringe benefit can be excluded from taxable income if the recipient is not an employee.

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Payslips & Tax Reporting

Once the taxable fringe benefit has been processed by Payroll on an employees paycheck, the taxable amount will appear on the employees Payslip in the Earnings Section as a Taxable Benefit.

If a taxable fringe benefit is reported after an employee has receive their final paycheck of the calendar year , a manual adjustment may be made directly to the employees Form W-2 to reflect the amount.

Fringe Benefit Rate For A Salaried Employee

To calculate the benefit rate of a salaried employee, add the annual costs of all fringe benefits offered and divide that number by their annual salary.

For example, if the total fringe benefits are valued at $20,000 and the employees annual wages are $100,000, the fringe benefit rate would be:

X 100 = 20%

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Benefit #4 Fringe Benefits Motivate Employees

Depending on the nature of the role and the company, fringe benefits may be earned over time.

Typically, earned benefits are through milestones within the company or internal promotion.

For example, a company may offer access to a company car for personal use once they reach a certain level of seniority within the business.

Fringe benefits earned over time arent just something for employees to work towards.

They are also benefits that motivate employees to go above and beyond, such as ensuring they pass their initial probation to receive benefits in a gym membership, entertainment services or food-related expenses as a part of their ongoing contract.

Is A Lifetime Achievement Award Given To An Employee Taxable

Sage BusinessWorks 2012 How to Account for Fringe Benefits on the W-2

An achievement award may be excluded from taxation as a fringe benefit if it meets certain criteria. For example, it must be worth less than $1,600 and cannot come in the form of cash or cash equivalents such as a gift certificate or gift card. It also cannot come in the form of stocks, bonds, or other securities. The exclusion also doesn’t apply to vacations, meals, lodging, and tickets to theater or sporting events. A wristwatch would, however, fall under the tax exclusion.

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Benefit #1 Fringe Benefits Help Attract Top Talent

If you have plans to hire people at the top level of your company, you need to find the right benefits to attract them away from what your competitors and similar-level businesses have to offer.

Whether this is a highly sought-after role or theres a specific person youd like to hire, introducing opportunities for fringe tax benefits can be one of the ways to attract the right attention from top talent.

Fringe benefits are particularly valuable to high earners as they reduce the income tax you pay, essentially offering equivalent monetary value without the extra tax on top.

If youre hiring for a role thats just about an income tax bracket, fringe benefits can be a way to bring that income down without reducing overall value.

What Are Payroll Tax Fringe Benefits

If youve ever worked for a company that offers private health insurance, gym memberships, or property as part of your employment, then youve likely already received some form of payroll tax fringe benefits.

As a practice used by many businesses across Australia, fringe benefits are an excellent way to stay competitive, provide added value to employment and attract high-value candidates.

Its important first to full understand what is payroll tax before diving into understanding fringe benefits tax.

As a business, youll need to pay fringe benefits tax for the benefits you offer but there are plenty of advantages to providing extras to your employees as a part of their employment package.

We take a look at what is fringe benefits tax in terms of what it can do for your business, why payroll tax fringe benefits might be the right fit for your business, and how the extra work of an FBT return is worth it for the benefits they can bring.

Read on now for all the details:

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Policy On Waiving Indirect Costs

Federal Grants and reimbursements as well as revenue streams dedicated to a specific program including special revenue funds and trust funds should fund the full cost of their programs. Indirect rates are designed to allocate and recover costs not otherwise directly charged to the program. It is A& F’s policy that they not be waived. Accordingly, requests for the waiver of indirect costs will be closely scrutinized. If any such waiver is granted, it shall only be for one fiscal year, unless otherwise noted.

In general, a waiver request should demonstrate that a particular fiscal hardship has beset the agency or account. The hardship should be short-term in nature, with the waiver of indirect part of a long-term plan to address the situation and regain a sound fiscal footing. Documentation of the situation must be provided to substantiate the request.

After review, if several waivers were granted in the past or recently requested, it will be A& F’s assessment that in most cases they indicate larger, unsustainable budget conditions of an agency’s federal grant or trust, and the additional request will be denied.

If a waiver is granted, it will only be allowed for the current fiscal year, and will expire on June 30 of that year unless expressly authorized otherwise.

Tuition Reimbursement Or Education Assistance

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Upskilling and gaining knowledge are important parts of every employees training and, in turn, an organizations growth.

Retention is a major cause of concern for most employers today. Paying for tuition reimbursement or other educational assistance is one of the most powerful ways to encourage employee loyalty.

A recent study by Gallup found that 65% of employees feel employer-provided upskilling is very important when evaluating new job opportunities. The good news is that money spent by a business on repaying tuition or other education expenses for employees is tax-deductible up to $5,250 per employee each year.

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Remote Area Fringe Benefits

Remote area fringe benefits are exempt when they are fly in fly out transport and accommodation. There is a concessional treatment for housing, residential fuel and holiday travel provided to employees in remote areas. For payroll tax purposes, fly in fly out arrangements are not included as wages.

Full exemptions are provided for residential fuel , housing assistance, domestic water, holiday transport and education costs.

  • Holiday transport – limited to the cost of the return economy airfare to the capital city of their work place, when the employee does not travel back to their hometown or that capital city.
  • Education costs – limited to the educational costs of an employee’s dependant that is required to live away from home in order to attend on a full-time basis, a primary, secondary or tertiary institution that is not within a reasonable distance of the remote place at which the employee performs services.

Benefit #10 Fringe Benefits Improve Employee Happiness

Happy employees are productive, hard-working employees that tend to stay within a company for longer.

Employee happiness and satisfaction are crucial indicators for a businesss long-term success.

When implemented correctly, benefits can help reduce turnover and create a more positive, collaborative working environment that supports business goals and targets.

Introducing fringe benefits can help to enhance employee happiness by providing staff with what they want while also maximising their possible income after tax.

For employees on the cusp of an income tax bracket, extra benefits such as a company car or living away from home allowance are helpful.

These fringe benefits dont contribute to additional taxes.

As a result, they are far more likely to improve satisfaction than extra pay that nudges them into the higher tax zone.

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Role Of The Comptroller

The Secretary of Administration and Finance has designated the Comptroller to act as the Secretary’s designee in all matters related to setting, negotiating, assessing, and recovering fringe benefit costs and indirect costs. The responsibilities associated with this designation are set forth in more detail in the paragraphs below. No department may submit or negotiate indirect cost rates or cost allocation plans to or with the federal government without the prior written approval of the Secretary or the Comptroller.

To assist the Comptroller in the calculation of indirect cost rates, the Comptroller may require departments to provide such information as is deemed necessary to carry out the provisions of this Bulletin, including but not limited to:

  • a current and complete organization chart of the department, identifying the positions of each unit
  • functional description of some or all units of the department and
  • financial reports or comparable supporting documentation as of the end of the fiscal year used as the cost base for the department’s Indirect Cost Rate Calculation.

The Comptroller may develop such additional procedures and guidelines as is deemed necessary to ensure that departments comply with the provisions of this Bulletin and with federal guidelines including Office of Management and Budget Circular A-87, “Cost Principles for State, Local, and Indian Tribal Governments.”

Benefit #3 Fringe Benefits Make Your Business More Competitive

Fringe benefits tax and not-for-profits

Businesses often have intense competition in their sector, whether from organisations that deliver the same service or adjacent companies that work in the same industry.

Are you concerned about losing out on talent to direct competitors or employees moving across to this business?

Fringe benefits are one of the ideal ways to make your business appear the best of the bunch.

Advertising fringe benefits from job listings can help differentiate your business and catch the eye of potential employees.

While most companies in your sector will hold similar responsibilities and equivalent pay scales, fringe benefits add to that value and say positive things about the companys culture as a whole.

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Flexibility In Withholding On Fringe Benefits

Normally, your company isnt required to withhold taxes on non-taxable fringe benefits. After all, the employees generally wont have to pay income tax or FICA on those benefits anyway. But taxable non-cash fringe benefits are a different story: They generally must be reported to the IRS and are subject to withholding of income and payroll taxes.

Nevertheless, the tax law provides employers with some flexibility in this area. Here are the basic rules:

Example Fbt Annual Calculation

An employers FBT return submitted to the Australian Taxation Office for the year ending 31 March 2021 includes the following:

Type 1 WA fringe benefits pre-grossed-up value $160,000
Type 2 WA fringe benefits pre-grossed-up value $90,000

Calculation = – $2,000) × 1.8868)

The taxable value of WA fringe benefits that should be declared for payroll tax for year ended 30 June 2021 is $467,926.

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Payroll Taxes: An Introduction

When your employer calculates your net pay, you often see several entries for taxes deducted from your gross pay. Your payroll tax deductions are mandatory contributions under the Federal Insurance Contributions Act, or FICA.

Your payroll taxes support Social Security and Medicare. This tax is a fixed rate of 7.65 percent of your gross wages. Normally, you wont pay FICA taxes on most common fringe benefits.

Federal income tax is a second tax deduction you’ll always see. The amount your employer withholds depends on your wages and your tax filing status. However, the Internal Revenue Service also requires your employer to withhold federal income tax on some types of fringe benefits.

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What Are Taxable Benefits

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According to the IRS, any employee benefits that arent explicitly listed as pre-tax or that cant be designated as non-taxable are taxable. This means that the taxable fringe benefits must be reported on your employees Form W-2 as taxable income, and youll also be required to withhold state and federal taxes.

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Payments For Tuition For Professional Development And Job

Departments may make payments for employees to take courses at other institutions. If these courses are not otherwise treated as a non-taxable fringe benefit under the rules specified above in “Non-Taxable Fringe Benefits,” they may be non-taxable as a qualified business expense for education. If an expense is qualified, it is not taxable to the employee, if the expense is non-qualified, it is a taxable fringe benefit and must be reported to Payroll tax accounting to ensure appropriate withholding.

To be qualified, an expense must:

  • Maintain or improve skills required by the individual in the individual’s employment
  • Must not be a minimum educational requirement for the employee’s position and
  • Must not qualify the individual for a new trade or business
  • Education must meet all three requirements to be considered qualified.. Each criteria is evaluated separately. Below is guidance for completing the required analysis. If, after reading the below, the department still has questions, contact the Tax Office at .

    • Maintain or improve skills required by the individual in the individual’s employment
    • This criteria merely requires that the educational activity be relevant to the employee’s job duties, and improve or maintain the skills relevant to his/her job.
    • In general, all education paid for by a UW department for one of its employees should meet this criteria
  • Minimum educational requirement
  • Qualification for a new trade or business
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