S-Corp Disability, Transport & Other Taxable Fringe Benefits
Fringe Benefit Definition
Fringe benefits are a form of compensation for services that take the form of product or service benefits in addition to salary or wages. Unless excluded by law, this is taxable income. While there are non-taxable fringe benefits, employers must determine the value of countable fringe benefits each year and provide this to each employee by Jan 31 on Form W-2 or Form 1099. The IRS can impose tax penalties, and you may lose valuable deductions if you fail to meet these requirements.
Employee Business Expense Reimbursements and Allowances
A working condition fringe benefit is compensation that seeks to reimburse an employee for something they need to buy to work for you. You can think of this as something you could deduct or depreciate if self-employed. For example, instead of buying computers for remote employees, you could have them buy them themselves and reimburse them.
Do not include this in the employee's income, but you would if they are a contract employee. However, if the employee does not provide proper receipts showing the value of the purchases or fails to return any overage allowance, this is taxable income.
Qualified Transportation Fringe Benefit
A company car, metro pass, etc., intended for personal use (including the commute) is income. This is in contrast to a work vehicle like a limo for a limo driver, which is not personal use while working. The employee should compensate you for the personal use percentage if there is a mix.
Otherwise, the percentage of personal use is income. The same applies if you give them a cash allowance to purchase transportation.
It's important to note here that if the employee has possession of the car when they are not working, this is treated as personal use, even if it's sitting in their driveway. This takes some of the guesswork out of reporting and the potential for argument about what personal usage truly is.
Employer-paid Group-term Life Insurance Coverage
An employer can pay for up to $50,000 in insurance without including this as income as of 2023. Anything over that is taxable.
Health Insurance, Dental, Vision, Accidental D&D, Etc.
These fringe benefits are subject to FITW and SITW but not FICA or FUTA. If the shareholder partially reimburses the company with their own money, that amount can be subtracted from their compensation. This may benefit the shareholders since they can now take a self-employed health insurance deduction.
Employer-paid Student Loan Debt
Generally, if the employer pays this, it's taxable income. However, the pandemic-related CARES Act authorized employers to pay up to $5250 in student loan debts without counting it as taxable income through 2025. With that said, some requirements are established under IRC Section 127:
- Payment of student loans cannot favor high-paid employees.
- No more than 5% of debt payments can go to shareholders or owners who own over 5% of the company in the form of stock or capital interests on any day in that year.
- Debt payment cannot be in place of other compensation.
- Debt payments cannot be for others, like an employee's child or spouse.
- The plan to pay debts must be in writing and communicated to employees with reasonable notice.
Disability Insurance Premiums
For shareholders who own 2% or more of a company, long-term and short-term disability premiums are subject to Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes. However, the disability payments themselves are not subject to these taxes and are, tax-free for the shareholders.
The value of Paid Time Off (PTO) received by someone through a PTO donation program is taxable income. This means that if someone receives PTO as a donation, they must report the value of the PTO received as income on their tax return. However, the donor of the PTO can also take a charitable deduction for the value of the PTO donated if they itemize their deductions on their tax return.
Other Non-Taxable Fringe Benefits
- Qualified retirement plan contributions
- Qualified retirement planning services
- No-additional-cost services
- Qualified dependent care assistance up to $5,000 (but restrictions apply)
- Qualified employee discounts
- De minimis fringe benefits (i.e., benefits that are of nominal value or wouldn't be reasonable to track individually. E.g., free snacks in the break room or a company picnic. Important: Cash and cash equivalents are always taxable regardless of the amount.
- Athletic facilities, if on-premise
How Exact Payroll Can Help
There is more to know about taxable items and exemptions, caveats, exceptions, and exemptions that can work in your favor. Getting this right is essential to avoid the added time, costs, and paperwork. Exact Payroll can provide comprehensive payroll services for businesses of all sizes to help streamline the process of navigating the overly complex U.S. tax code. Contact us today to schedule a brief consultation with our highly trained professionals.