BENEFITS

Fringe Benefits Tax Deduction

If you are ready to hire an employee or contractor, you may want to consider including various fringe benefits as part of their compensation package. Fringe benefits are non-cash compensation for services. Fringe benefits may be taxable or non-taxable so it is important you understand the proper treatment for various types of benefits to ensure you are in compliance with IRS regulations. Regardless of the tax status, fringe benefits offered for legitimate business purposes will generally be deductible on your Schedule C.

PROFESSIONAL SERVICES

Max is a sole practitioner CPA with one employee. As part of his employee's benefit package, Max loads $130 per month directly onto her bus pass. This transportation benefit would be considered a non-taxable fringe benefit deductible on line 24a of Max's Schedule C. Note however that if he provided more than $130 per month, excess amounts would be taxable. Additionally, if Max simply included an additional $130 per month on her paycheck for transportation it would generally not qualify as a non-taxable fringe benefit since conceivably, his employee could spend the cash on anything.

CLEANER

Robin operates her own cleaning business and recently hired two employees to help her keep up with her house calls. Robin provided each employee with a company phone so she would be able to contact them at her convenience, however, she doesn't mind if her employees also use the phone to make personal calls. Since the employee cell phones were issued for business purposes, they would be considered a non-taxable fringe benefit deductible on line 25 of Robin's Schedule C.

AUTHOR / SPEAKER

Phil owns a small editorial business and employs a full time administrative assistant. In addition to paying his assistant a base salary, each year he sends him on an expenses paid trip to Mexico as a token of his appreciation for his assistant's hard work. Using the General Valuation Rule, the trip has a fair market value of $2,500. Since this annual vacation serves no business purpose / is in exchange for services provided throughout the year it would be considered a taxable fringe benefit. Accordingly, Phil would need to withhold income tax and payroll taxes from his employee's paycheck based on the fair market value of the trip.

UBER DRIVER / RIDESHARE

Maria owns a small Uber fleet operation with one employee. Maria pays her employee an hourly rate and provides him with one of her vehicles. As a perk of employment, he can have possession of the vehicle and use it for personal purposes for the duration of his employment. The vehicle has a fair market value of $25,000 and Maria makes lease payments totaling $4,800 per year. Based on daily mileage reports received by her employee, she determined the vehicle is used for business purposes 75% of the time. When Maria prepares her taxes she can deduct the full cost of the lease on her Schedule C, however, throughout the year she would need to withhold tax from her employee and pay employer taxes on the value of the vehicle that can be attributed to his personal use, $1,200 ($4,800 X 25%).

DEVELOPER / ENGINEER

Faruk is a web developer who also monitors and regularly maintains his client's websites. He has two employees who rotate working double shifts to ensure Faruk's clients can still be serviced outside of normal business hours. Because his employee working nights has limited time to leave the office during his shift, Faruk orders food to be delivered to this employee every evening. When Faruk is ready to file his taxes, he would be able to deduct 100% of these business meals on line 24b of his Schedule C since the night shift meals purchased were for Faruk's benefit and would be considered a non taxable fringe benefit.

DEDUCTING EMPLOYEE WAGES

  • Non taxable fringe benefits do not need to be reported as part of compensation, subject to IRS limits, and can include but are not limited to transportation benefits, employee discounts, athletic facilities, achievement awards, employer provided cell phones, meals, health insurance and life insurance.
  • Taxable fringe benefits include but are not limited to non-taxable fringe benefits that exceed IRS limits, personal use of business vehicles, gift cards and vacations.
  • Fringe benefits provided to an employee should be reported on their W2, benefits to an independent contractor on Form 1099-MISC and benefits to a partner on Schedule K-1.
  • Since fringe benefits may involve compensating your employees with tangible goods or services placing a value on the benefit for taxation purposes can be difficult. Typically, you would use the General Valuation Rule to determine the value of your fringe benefits, which dictates that the fair market value of the benefit is equal to what an employee would have to pay an independent third party to lease or buy the benefit. If you provide use of a company owned vehicle in exchange for services, you may be able to use the Cents-Per-Mile Rule, Lease Rule or Commuting Rule to determine the value of the benefit (each method has specific guidance refer to IRS for details).
  • Since the nature of fringe benefits can vary widely they can be claimed across your Schedule C. For example, if you provide an employee with health insurance it would be deductible on line 14 of your Schedule C, if you provide them with use of a company vehicle, it could be deductible on line 9 or 20a of your Schedule C.
  • There are dozens of fringe benefits, each with their own unique rules and tax implications. If you offer fringe benefits, or are the recipient of fringe benefits, you should consult with your accountant to determine proper treatment and reporting requirements for each specific benefit.

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