Over the years the Internal Revenue Service has issued regulations and notices which deal with W-2 reporting for owners of businesses. These notices simply reinforce advice that we have given our clients in the past and it is clear that you will need to take steps to comply with this guidance. Additionally, we want to remind you of the reporting requirements concerning company-provided fringe benefits and personal use of company-provided vehicles. Special rules apply to qualified demonstrator usage; accordingly, we have provided a separate memo relating to these rules. To this end, we are providing the following general information. Should you, your office manager or your payroll clerk have any questions, please give us a call.
Taxable fringe benefits are reported on the employee’s Form W-2 and are generally subject to both federal income tax and FICA withholding requirements. You may also identify the total value of the fringe benefits in Box 12 or Box 14, depending on the type of benefit. Following is a list of some common fringe benefits that should be included in employee's Form W-2. Obviously, not every item will apply to you.
- Employer-provided parking in excess of $255 per month.
- Employer-provided transportation (i.e., transit passes) in excess of $255 per month.
- Cost of providing group-term life insurance coverage in excess of $50,000 (nondiscriminatory plans only).
- Cash payments under a Cafeteria Plan.
- Personal use of company-provided vehicles (see attached methods for valuing this benefit).
- Employer-provided Child or Dependent Care Services in excess of $5,000 or the employee’s earned income.
- Expense reimbursements and advances if the employee is not required to provide substantiation and/or return any excess advance.
- Payments for health, disability, life or accident if not paid in connection with an employee benefit plan or paid under a discriminatory plan.
- Education expenses paid for courses that are not required for the employee to perform his job duties.
- Payments under an Education Assistance Program that exceed $5,250.
- Nonqualified moving expense reimbursements (reimbursements for expenses other than cost of moving household goods and travel expenses, excluding meals, from old residence to new). Qualified moving expenses are reported on the W-2 as nontaxable benefits.
- Any employer-provided benefit that is both business and personal to the extent of the personal portion. Expenses considered personal in nature includes, but are not limited to, payment of the employee's share of FICA tax, club membership dues, travel expenses for employee's spouse, etc.
- Premiums paid on group permanent life insurance.
- Awards and prizes (non-cash), i.e., employee achievement awards, unless they pertain to length of service and safety and do not exceed specified limits (generally $400).
- Employee Contributions to Archer Medical Savings Accounts or HSA’s.
More than 2 Percent Shareholder - Employees of S Corporations
In addition to the taxable fringe benefits listed above, more than two percent shareholder - employees must also include the following benefits in income.
- Premiums paid to an accident and health plan for the employee, spouse and dependents.
- Premiums paid for any amount of group-term life insurance coverage.
- Cost of meals and lodging furnished for the convenience of the employer on the employer’s premises.
- Cost of employer-provided group legal, dependent care and educational assistance programs.
- Cost of benefits provided under a Cafeteria Plan.
- Disability insurance premiums if paid under a benefit plan provided to employees.
The company is entitled to deduct these expenses in determining its taxable income. Any of the above expenses, with the exception of items B and C, includable in the shareholder-employee’s W-2 are not wages subject to FICA and FUTA tax if they are paid under an employee benefit plan established for the company's employees.
In determining whether a shareholder owns more than a 2 percent interest, stock owned by any lineal descendent (i.e., children, parents, spouse, etc.) is considered owned by the shareholder - employee.
The above list of taxable fringe benefits is not meant to be all-inclusive. There may be other benefits not listed and specific to your company that should be included in the employees’ W-2. There may also be exceptions available that could result in some of the above benefits not being taxable to employees. If you need further clarification or additional information on any of these fringe benefits, please do not hesitate to call me.