Learn how to create payroll items for taxable fringe benefits.
Do you need to include fringe benefits for your employees? We'll explain what fringe benefits are and how to set them up.
What is a fringe benefit?
A fringe benefit is a form of pay for the performance of services, given by the employer to the employee. For example, Personal Use of a Company Car (PUCC), in which you allow the employee to use a business vehicle for personal use, is a type of fringe benefit.
Non-cash fringe benefits should ideally be reported on a paycheck where the employee has regular wages to offset the taxes on the fringe benefit items.
Are Fringe Benefits Taxable?
Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it.
Including Taxable Benefits in Pay
The recipient's pay must include the amount by which the value of a fringe benefit is more than the sum of the following amounts:
- Any amount the law excludes from pay
- Any amount the recipient paid for the benefit
Fringe Benefits Valuation Rules
You must use the general valuation rule to determine the value of most fringe benefits. Under this rule, the value of a fringe benefit is its fair market value.
Fair Market Value
The fair market value of a fringe benefit is the amount an employee would have to pay a third party in an arm's-length transaction to buy or lease the benefit.
This amount is determined on the basis of all the facts and circumstances. The fair market value of the benefit isn't based on the amount the employee considers to be the value of the fringe benefit, nor the cost you incur to provide the benefit.
Set up a taxable fringe benefit payroll item
To set up a taxable fringe benefit payroll item:
- From Lists, select Payroll Item List.
- Select Payroll Item then select New.
- Select Custom Setup.
- Select either Company Contribution or Addition, and select Next.
- Company Contribution: Adds the value of the fringe to be taxed but doesn't increase net pay
- Addition: Adds the value of the fringe to be taxed and increases net pay
- Enter a name for this item and select Next.
- Select an Expense account and Liability account from the drop-down lists and select Next.
- From the Tax Tracking Type drop-down list, select Fringe Benefits and select Next.
- Select Next twice (to bypass the Calculate based on quantity window).
- Enter that default rate in the first section of the Default rate and limit window if the benefit will be a specific amount.
- Enter the amount of any limits on the item in the second section of the window.
- Select Finish.
After you've created the payroll item, select the scenario that fits how the fringe benefit will be paid to the employee:
- If the amount will be included on a paycheck with regular wages to offset the taxes, enter the amount, using the Fringe Benefit payroll item, under Other Payroll Items.
No other deductions need to be added as the amount isn't added to the net check, and only taxes are calculated.
- If the employee won't receive any further wages for the year, and the employer will loan the tax amount to the employee, select Addition, select None for Tax Tracking, and the payroll item (for example, called Advance for payroll tax) on the paycheck for the tax amount.
This amount must be paid back to the employer by the employee in the time frame outlined in Publication 15 (Circular E).
- If the employee won't be receiving any further wages for the year, and the employer will be the one paying for the taxes, select Addition, and a Tax Tracking type of Compensation, and the payroll item to gross up the check.
You are responsible for determining the value of all non-cash fringe benefits. For more information, see Section 3 of IRS Publication 15-B.