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In the Payroll Mailbag …

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in Office Management,Payroll Management

Anticipating a visit from the IRS?

Question: One of our employees filed a 2016 W-4 form on which he claimed an exemption from income tax withholding. On his 2016 W-2, we reported his income in Box 1 and that no income taxes were withheld in Box 2, and he was quite upset about it. He demanded that we file a W-2c form showing no income, in addition to the no tax withheld. Of course, we refused. He’s now told us that along with his 1040 he filed a Form 4852 showing $0 income. We’ve never heard of this form. What happens now?

Answer: Odds are, you’ll be contacted by the IRS. You may have to respond to a Form 4598, which the IRS uses to resolve discrepancies in amounts reported on information returns. After that, don’t worry.

The worst case scenario is that this employee sues you over the W-2. The company won’t be liable to the employee, since the tax code requires you to provide employees with W-2s that accurately show the total amount they earned during the previous year.

Are free legal services we provide considered a tax-free fringe?

Question: We are an attorney’s office. One of the benefits we provide to employees is free legal representation. An employee recently bought a house, and the firm handled the closing for him. Our office manager says that the value of our representation isn’t taxable, but is a de minimis fringe benefit because the services were rendered in-house. Payroll isn’t so sure. Who’s right?

Answer: Your office manager is partially correct, but it’s not a de minimis fringe. Employers may offer up to a 20% discount on services to employees tax-free. So, take the fair market value of an attorney’s services related to the closing and discount 20%. The value of the benefit exceeding 20% is fully taxable. If you choose not to withhold on the excess, you’ll have to gross-up the payment.

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