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Calculating Fringe Benefits for W-2s.

Posted by Lauri A. Lisanti, CPA, MAcc, CPS, Certified QB ProAdvisor on Nov 12, 2018 3:42:07 PM
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The holidays are quickly approaching and the year-end is right around the corner. Before running the last payroll of the year, business owners not only need to make sure they have completed any W-9s for vendors that will be receiving 1099s, as well as make sure that any taxable fringe benefits are included in the owners and employees W-2s. Given the vast number of fringe benefits offered and how they are taxed, it can be confusing determining what is to be included in wages.  

 

Health Insurance

Generally, company paid health insurance is not considered taxable to the employee.

However, for employees that are 2% or more shareholder in a S corporations, the health insurance is considered taxable to the shareholder and should be reported in Box 1 (Federal wages) and Box 14 (Other) on Form W-2. The Internal Revenue Service may exclude the deductibility of the health insurance from the corporation’s books if the shareholder’s health insurance is not reported in the W-2s.

 

Group Term Life Insurance

The first $50,000 of group term life insurance coverage is not taxable to the employee. Life insurance coverage is considered group if it is offered to 10 or more employees. 2% shareholders are not considered employees and not included in the 10 or more number. If employees have coverage of greater than $50,000, the additional coverage is taxed at a rate based upon the age of employee and multiplied by the cost per $1,000 of protection. The table listed below, extracted from the Internal Revenue Service website, Publication 15-B, Employer’s Tax Guide to Fringe Benefits, shows the rates for 2018.

 Cost per $1,000 of Protection for 1 Month

 

As an example, Mary Marketer has $100,000 of coverage and is 30 years in age. The amount that would be taxable to her is calculated as follows: $100,000 - $50,000 = $50,000 of taxable coverage. $50,000/$1,000 = 50 x .08 (the cost above) = $4.00 taxable benefit to be included in Mary’s W-2. If Mary contributes any of her salary to the life insurance coverage, the taxable benefit would be reduced by the amount of her contribution.

For purposes of the two percent shareholder, the first $50,000 exclusion from the taxable wages does not apply. The total amount of the coverage is included in the calculation.

 Download Free Fringe Benefits Spreadsheet

Personal Use of Company Vehicle

Employees that are provided a company vehicle; any personal use of the vehicle is to be included in their compensation.

The Internal Revenue Service allows that any benefits provided in November and December can be treated as paid in the following year (in essence allowing the employer to determine the taxable benefit on an October – October or November – November year).

There are also 3 methods of determining the value of the leased vehicle to the employee:

  • The Annual Lease Value Method,
  • The Commuting Value Method, or
  • The Cents-Per-Mile Method.
Employers can use different valuation methods for different employees.

 

The Annual Lease Value method is based on the automobile’s fair market value on day one that the vehicle was made available to the employee.  The personal use of the vehicle is determined on a percentage of the miles driven during the year and must continue to be used for that vehicle. The fair market value of the vehicle is redetermined at the beginning of the fifth tax year or if the vehicle is transferred to another employee.

The Commuting Value method is based upon a flat rate of $3.00 round trip commute. This method is used if the employee is required to use the company vehicle for his/her commute, personal use of the vehicle is prohibited and does not occur and the employee is not a highly compensation officer or employee or an owner.

The Cents-Per-Mile method is the most prevalent method of determining the personal use of a company vehicle. The beginning and ending mileage are determined and commuting mileage is taken out of the difference. The business versus personal mileage is calculated and the personal mileage is multiplied by the current IRS business mileage rate (currently 54.5 cents per mile). This method must be adopted beginning day one that the vehicle is available to the employee. The cents-per-mile method includes the value of maintenance and insurance for the vehicle. Employees need to keep good records outlining the date of each use of the vehicle, mileage per trip and business purpose of the trip and must exclude their commuting miles.

Download this chart for better help determining which of the listed benefits are taxable or not. 

For those fringe benefits not listed, the IRS outlines the tax treatment in Publication 15-B at https://www.irs.gov/pub/irs-pdf/p15b.pdf .

The calculation of the taxable benefits needs to be completed before the final payroll of the year is run as it is imperative the wages are reported correctly not only on the W-2s but also the quarterly payroll returns. Otherwise, the returns may need to be amended at an additional cost to the employer.

With the information on some of the more prevalent fringe benefit calculations, hopefully some of the confusion has been alleviated and that the approach of year-end is met with less apprehension and can be enjoyed knowing the fringe benefit calculation have been completed.

 

 Download Free Fringe Benefits Spreadsheet

 

Topics: Tax, Fringe Benefits

Download Free Fringe Benefits Spreadsheet

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