Employee benefit programs are an important part of any business, but it's important to understand the tax implications of these programs. Additional benefits are usually included in an employee's gross income, and are subject to income tax withholding and employment taxes. However, there are some exceptions, and certain benefits may be considered tax-exempt. In this article, we'll explore the tax implications of employee benefit programs and provide guidance on how to ensure your program is compliant with federal regulations. Most additional benefits are taxable, but there are some exceptions.
Non-taxable benefits are not subject to withholding federal income tax, Social Security, Medicare, or federal unemployment tax (FUTA), and generally do not have to be reported on a W-2 form. However, it is important to know the conditions under which these benefits are considered tax-exempt, as they may vary on a case-by-case basis. If the beneficiary of an additional taxable benefit is not your employee, the benefit is not subject to employment taxes. However, you may need to declare the benefit in one of the following informational statements.
The value of additional benefits that are not tax-exempt under the Internal Revenue Code must be included in the employee's taxable income. It is also important to note that if a benefit would be excluded if it met all federal requirements, but for some reason your plan does not meet the requirements, then it is still taxable. For example, contributions of a cafeteria plan to employee HSAs cannot be greater for employees with higher salaries than for employees with lower salaries. To meet these requirements, all employees who had at least 1,000 hours of service during the previous plan year must be eligible to participate, and each employee who is eligible to participate in the plan must be able to choose any benefits available in the plan. In addition, you must indicate the value of all dependant care assistance you provide to an employee under a DCAP in box 10 of the employee's W-2 form. If the employee buys it, you must reimburse the employee for its cost (for example, the taxi fare) under a good-faith reimbursement agreement. Generally, meals provided on a day when an employee is not working are taxable.
This also applies when payments are made directly or indirectly to an employee under an accident or employee health plan that meets certain conditions. Your plan must not favor key employees in terms of benefits if all benefits available to participating key employees are also available to all other participating employees. The exclusion also applies to goods and services that you provide to an employee so that they can perform their work. However, if you provide a mobile phone for promotional purposes or as additional compensation for an employee, then this value must be included in their salary. The exclusion applies regardless of the length of employment, whether you pay premiums directly or reimburse the former employee for premiums paid, and whether the employee's separation is permanent or temporary. If an employee chooses to receive a qualifying benefit under the plan, then this benefit will not be taxable even if they could have instead received a cash or taxable benefit. Retirement planning services that are not available under the same conditions to each member of a group of employees who normally receive education and information about the employer's qualified retirement plan cannot be excluded from the salary of a highly paid employee. Finally, if you paid taxes but withheld a smaller amount from the employee than was required, then you can return to them any social security, Medicare or income taxes that were deposited on your behalf and included in their W-2 form.