Employers are required to tax wages paid to employers, however not all employee compensation is considered wages. In fact there are lots of exceptions and misconceptions that can lead to incorrect classifications, omissions, errors, and penalties.
Here's a quick reference guide to help ensure you shine bright as a beacon of compliance and avoid some of the common misclassifcation misteps.
Salaries, vacation pay, bonuses, commissions, and certain fringe benefits are some examples of amounts that you include in wages for employment tax purposes.
Cash bonuses or gifts - When you award employees with cash (or gift certificates, or similar items easily exchanged for cash) you must report the value of such gifts as extra salary or wages, regardless of the amount involved.
Non cash Prizes - If you award prizes or bonuses in the form of goods or services (e.g., a vacation trip for meeting sales goals), you must report the fair market value of the goods or services in the employee’s income
Employer-provided professional services. The value of employer-provided tax preparation, accounting, legal, or brokerage services should be reported as extra salary or wages.
Do report services provided services if the employee accepts them services in exchange for reduced severance pay.
Personal use of employer-provided vehicles. If you provide a car (or other highway motor vehicle) to your employees, the personal use of that vehicle may be taxable as a noncash fringe benefit. See IRS Publication 525 for how to determine the value of that benefit.
Many fringe benefits are not taxable and therefore exempt from the tax reporting requirement. Hree's a partial list based upon our customer inquries:
Diminis (minimal) Gifts : If you provide employees with a product or service and the cost is so small that it would be unreasonable for you to account for it, the value need not be included in the employee’s income. Examples include holiday gifts, occasional theater or sporting event tickets, flowers, fruit, or books. There is no set dollar limit, but the IRS has ruled in at least one case that a gift over $100 must be treated as taxable income.
Achievement Awards - item of “tangible personal property” (e.g. a trophy or award plaque) that you give an employee for length of service.
The award must be given as part of a meaningful presentation and under such conditions that it does not amount to disguised compensation. Depending on the circumstances, the excludable value of the award is limited to either $400 or $1,600, or the employer’s actual cost.
Employer-provided goods and services Discounts on employer-provided goods or services normally offered to customers during the course of business may be exempt from tax.
No-additional-cost services generally these are exempt if you provide such services to customers during the ordinary course of business, and incur no substantial additional cost in providing those services to your employee.
Lodging and meals on your business premises are exempt if certain conditions are met (e.g., furnished for the employer’s convenience, the employee must accept lodging as a condition of employment).
Reimbursements for Educational Assistance. Employees can exclude from their income up to $5,250 of qualified employerprovided educational assistance if certain conditions are satisfied. See IRS Pub. 970 for details.
Moving expense reimbursements. Applies only to moving expenses that the employee could deduct if he or she had paid or incurred them without reimbursement. Does not apply if the employee actually deducted these expenses in a previous year. See IRS Pub. 521 for details.
Group-Term Life Insurance - You can provide up to $50,000 of group-term life insurance coverage without reporting the employer’s cost in the employee’s income, report anything over this threshold as taxable wages
Accident and health benefits. As of this writing, employer contributions to an employee’s accident or health insurance plan are nontaxable, including: — Contributions to the cost of accident or health insurance, including qualified long-term care insurance
COBRA premiums - Amounts you pay to maintain medical coverage for a current or former employee under COBRA should not be reported as taxable wages, provided the plan covered is a “qualified plan..
Check your current payroll setup, or better yet ask your vendor's support team to help get it done for you so you can get out of the muck and back to running your business.