The IRS is cracking down on employers that don’t properly report their employees’ wages. Many employers and employees may think that certain fringe benefits don’t have to be included in wages – and therefore subject to federal income tax withholding and employment taxes – but this can be a costly error to make.
There are five key benefits that employers may not be treating properly from a tax perspective. However, employers are not the only ones who may be held liable for errors – employees should take notice, because they are responsible for properly reporting income each year regardless of whether they receive a correct W-2 form from their employer. Employers could be held liable for federal income tax and employment tax withholding that should have been withheld on the under-reported amounts, while employees could be held responsible for the income tax owed on the under-reported amounts – or tax fraud, if income is knowingly under-reported.
Fringe benefits can be both taxable (included in your taxable income and, therefore, reported on your W-2) and nontaxable (not included in your taxable income and may not have to be reported on your W-2). To avoid problems with the IRS, it’s vital to know the difference.
Taxable vs. Nontaxable Fringe Benefits
The value of all fringe benefits must be included in your income unless they are specifically covered by an exception and are nontaxable. There are many different types of nontaxable fringe benefits, but two of the most common are the de minimis fringe benefit and the working condition fringe benefit.
1. De Minimis Fringe Benefits
A de minimis fringe benefit is defined in the Internal Revenue Code as property or services with a value so small that accounting for it is unreasonable or administratively impracticable for the employer.
There is no specific dollar amount that if exceeded automatically makes a benefit more than de minimis. However, an unofficial guideline is around $75, as the IRS has specifically provided that $100 would not be considered de minimis.
Some examples of de minimis fringe benefits include the following, so long as they are provided infrequently:
- Personal use of a photocopier
- Employee picnics
- Sporting event or theater tickets
- Coffee, donuts, or soft drinks
- Flowers for special occasions or non-cash holiday gifts
The following are examples of benefits that would not be considered de minimis and, therefore, should be included in taxable wages:
- Cash or cash equivalents
- Use of employer’s vacation home or boat
- Country club or athletic facility dues
2. Working Condition Fringe Benefits
This type of fringe benefit includes property or services that, had you paid for it, would have been deductible on your tax return as an unreimbursed business expense. However, in order to be considered a working condition fringe benefit that is excluded from your taxable wages, the benefit must relate to the employer’s business, must be deductible if paid personally, and the business use must be documented with records (such as receipts).
Examples of working condition fringe benefits include traveling to attend a client meeting, the cost of lunch or dinner where business is conducted, or attendance at conferences related to your job.
How to Avoid Under-Reporting Your Income
You may under-report your income and not even realize it. There are five commonly missed sources of income you should report:
- Gift Cards or Cash Equivalents. If you received a gift card, no matter how small the amount, it should be reported in wages – even a $5 gift card.
- Prizes and Awards. Did you win a contest at work? If so, did you receive an award? What about an iPod as a prize in a raffle? It should be included in your wages.
- Regularly Provided Snacks. Does your company continuously keep the fridge stocked with complimentary soft drinks? Do they bring in pizza every single Friday? Is there a constant supply of Cheez-Its and peanut butter crackers in the kitchen? If snacks are provided on a regular basis and not just occasionally, the value of the snacks should be included in taxable wages.
- Gym Membership. Does your company promote preventative wellness and provide you with a gym membership? What about a certificate for a massage or complimentary sessions with a personal trainer? If so, the value should be included in your wages (unless you work at a gym, in which case a different fringe benefit exclusion may apply).
- Personal Use of Company Car. Do you use a company car for work? Are you allowed to use it for errands and personal business on the weekends? If so, the value of that personal use should be included in wages.
While every employer has the responsibility to properly report its employees wages, each individual is ultimately responsible for correctly reporting their income to the IRS. If you receive any of the benefits described above, ask questions. The best place to start is with your company’s payroll department. Make sure that you report the value of any taxable fringe benefits as income on your tax return, whether or not your employer correctly includes them in W-2 wages.
Even if your employer claims to properly report all wages, make sure you keep track of the benefits you believe to be taxable, and include that value on your tax return. Make sure you aren’t setting yourself up for any tax penalties for under-reporting your income.
Do you receive any of these types of fringe benefits? Have you ever thought about whether the value of these benefits has been included in your wages?