Fringe Benefits and Employment Tax

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Churches and other nonprofit employers may officer fringe benefits that are subject to state and federal employment taxes. In particular, nonprofit employers should familiarize themselves with the benefits that are exempt from employment tax and which benefits have limitations on how much of the benefit is taxable. For more information about fringe benefits and employment tax contact Church Law Center at (949) 892-1221 today.

Employers, including nonprofit organizations, may provide a variety of fringe benefits to their employees and independent contractors. It is important to note that most fringe benefits are considered taxable income, so awareness of what fringe benefits are being offered is critical to the success of any nonprofit organization.

What are fringe benefits?

A fringe benefit is a form of pay for the performance of services. This can come in many forms: use of a company vehicle for commuting, achievement awards, adoption or educational assistance, even employee discounts. Typically, a fringe benefit would be anything “extra” on top of the legally required benefits like worker’s comp or the company’s provided health plans.

Fringe Benefits and Taxes

While there are exceptions, fringe benefits are generally subject to income tax and FICA tax. If the recipient is an employee, the benefit is also subject to employment tax. For non-employee recipients, the benefit must be reported on form 1099-NEC for independent contractors or Schedule K-1 for partners. Generally, the taxable portion of the benefit can be reduced by any amount that the recipient pays for the benefit, or by any amount that the law excludes from compensation (such as low dollar holiday gifts). IRS Publication 15-b provides a list of special rules for various types of fringe benefits and their exclusions. It is important to note that any benefit that is not specifically excluded is taxable.

Benefits and Risks of Offering Fringe Benefits

Offering fringe benefits can be an effective means of attracting and retaining high quality employees, but employers should carefully weigh the benefits and the risks before deciding which benefits to offer. Fringe benefits can increase employee retention and company loyalty; certain fringe benefits such as tuition assistance can help develop employee competence; and fringe benefits can even encourage employee focus as important needs like dependent care are met by fringe benefits. However, these benefits do come at a cost to the provider. If the recipient does not prove to be an effective performer, the cost of offering the benefit may be too high. Additionally, employers should also consider the long-term cost of each benefit as it may lead to disappointment and dissatisfaction if a benefit needs to be removed in order to meet financial obligations.

Another benefit to employers is the options available for withholding, depositing, and reporting noncash fringe benefits (not including the transfer of personal or real property of a kind normally held for investment.) For employment tax and withholding purposes, the benefit can be treated as paid on a pay period, quarter, semiannual, annual or other basis. Additionally, the same basis need not be used for all recipients. The period can be changed as often as needed so long as all the benefits  are treated as paid by December 31 of the calendar year. Even if the employee receives the full value of the benefit at one time, the employer can treat it as paid on one or more dates throughout the same calendar year. There is also a special accounting rule that allows employers to treat the value of taxable noncash fringe benefits that are provided in the last two months of the year as paid in the following year. Use of the special accounting rule is an option that may help alleviate end of the year payroll stresses and is available to all business types, including nonprofits.

For assistance in determining the best use of your nonprofit’s resources, please contact the Church Law Center of California at 949-892-1221. It would be our pleasure to serve your nonprofit as you work toward your fulfilling you mission.

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