Offering new perks? Heed tax rules on fringe benefits

With pressure on wages still tight, employers are whipping up new employee perks almost every day. The problem, of course, is that no one consults Payroll before the big rollout to employees.

That’s a mistake, since perks are taxable, unless the tax code says they’re not.

Gas and go. To combat high gas prices (down from earlier this year, but still substantially higher than this time in 2010), some companies are giving employees preloaded gas cards as bonuses and birthday presents. Gas cards have a dollar value, so, like any gift card, they’re fully taxable to recipients. If you don’t want to hand employees a surprise tax bill, the company needs to pay employees’ taxes by grossing up the face value of the gas card.

On the other hand, some employees have access to more fuel-efficient company cars. This perk is a tax-free working condition fringe benefit to em­ployees as long as they use company cars for business and they account for the business use of the car. That means documenting whom they saw, the business they conducted and the miles they drove.

Employees’ personal use of company cars is taxable. Break: For company cars only, income tax withholding is optional. If you choose not to withhold, notify employees that you haven’t withheld, and include 100% of the value of their business and personal use in the appropriate boxes on their W-2s. If you do withhold income taxes, only the taxable value of employees’ personal use is shown on their W-2s. In any event, FICA withholding applies.

There’s no place like home. Employees who work from home don’t have to drive at all.

Tax rules: If you require employees to work from home, instead of merely allowing it as an option, you can provide office equipment (e.g., Internet access, computers, printers) as a tax-free working condition fringe benefit. Employees may be able to deduct their home offices on their 1040s and you can reimburse them tax-free for expenses (including gas) they incur for traveling to see clients or for an occasional trip into the office for meetings.

As good as this sounds, there are traps:

  • Home offices must be exclusively used on a regu­­lar basis as the principal place of business, and this exclusive and regular use is for the con­­­­­­­­­venience of the employer. Requiring employees to telecommute takes care of the convenience-of-the-employer part of the test. Exclusive use gen­­erally means a separate room or structure that other family members can’t access. So a computer and some filing cabinets in the family den won’t do.
  • The tax code requires employees to keep records of their business and personal use of employer-provided office equipment. Personal use is taxable. You can take a lot of air out of an IRS challenge by having a policy prohibiting personal use of company equipment. Make sure your telecommuters sign off on any policy.

Financial wellness. Money is on everyone’s mind and employees are no different. In response, employers and local banks are teaming up to offer financial literacy presentations.

Tip: When publicizing this training, don’t tie a bank’s presentation to your 401(k) plan. That way, you won’t run afoul of the Employee Retirement Income Security Act. In addition to financial literacy, banks will talk about IRAs, mortgage refinancing and debt management.

Good news: This benefit qualifies as a tax-free de  minimis  benefit.

On-site health care. Another popular tax-free perk is offering employees on-site health care. This could be a one-time occurrence—such as free flu shots—or an ongoing clinic.

Watch out: Beginning next year, the value of health services provided by on-site health clinics, while still not taxable to employees, must be included on their W-2 forms.

Heads up: The IRS has yet to issue guidance on how to value those services.

WELLNESS: With the cost of health benefits continuing its upward trend, more employees are participating in wellness programs. A common reward is reduced health care premiums, which, like all employer-paid health care, is tax-free. But other rewards, such as employer-provided cash, gym memberships, magazine subscriptions for individual employees, the cost of nonprescription diet food and subsidies for home exercise equipment are fully taxable.

Commuting cost hike in the offing

The 2010 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act extended for one year the increase in the amount employees can exclude from their income for qualified mass-transit expenses to $230 a month, the same amount that can be excluded for employer-provided parking.

However, unless Congress again extends the current mass-transit exclusion, it will be considerably less generous next year. Key: Employees may pay for mass transit fringes through pretax deductions, and amounts left at the end of a year may be carried forward and used to buy mass transit fringes during the next year.

PAYROLL PRACTICE TIP: Employees won’t be out-of-pocket should the tax exclusion for mass transit fringes sink next year. However, employees who defer too much and who are terminated next year won’t be able to cash out the remainder in their accounts. Therefore, it’s prudent to communicate the possibility that the pretax deferral amount for mass transit fringes may decrease. Employees can then plan any adjustments to their pretax deferrals if they choose, and, more important, they won’t contact you about your “mistake” regarding the excludable amount.