How to Identify and Calculate Fringe Benefits In Your Employee Expenses
Not all of the compensation your employees receive arrives in their paycheck. “Fringe benefits,” also known as “imputed income,” is a form of non-cash payment that employers remit to employees, often as incentives, for the performance of services. Imputed income is generally taxable, and must be included in the total amount you report on W-2s.
Companies provide fringe benefits in a variety of ways: insurance coverage, on-site office perks, and company cars. Some fringe benefits are paid through T&E; employees spend their own money on fringe benefits, submit them as expenses, and receive reimbursements. To the IRS, these expense reimbursements represent income to the employee.
In this article, we’ll go over the basics of imputed income—what it is, how you calculate it, and why T&E makes for a convenient method of delivering fringe benefits.
Please note: Abacus does not provide accounting advice. Speak with an accountant to determine the particular needs of your business.
What is imputed income?
Fringe benefits are any benefits that you give employees in addition to their salaries or hourly wages. This includes incentives given to only certain employees, such as bonuses or awards. The IRS requires employees to attribute, or “impute,” value to these non-wage benefits and report it as taxable income.
IRS Publication 15-B specifies the many non-taxable fringe benefits you do not need to include in the recipient’s pay. These exceptions apply for a number of reasons. Some benefits are negligibly small (known as “de minimis”), or exist on site and can only be used by employees (in-office gyms), or are incidental to the employer’s main business (such as when restaurant employees eat for free). Additionally, a number of taxable fringe benefits are withheld up to a certain dollar value. Commuter passes, for example, don’t count as fringe benefits as long as they’re under $255.
Outside of that document’s specifications, any perk offered as an inducement to work is taxable. It’s your finance team’s job to gross up the value of those fringe benefits so that your employees—full-time or not—can report the imputed income on their taxes.
How to calculate imputed income
The imputed income the IRS requires you to report is the taxable portion of the total value of the fringe benefits you provide. To find this amount:
- Identify and exclude de minimis fringe benefits. You’re going to have to add up the value of the fringe benefits you provide your employees, so start by sorting out the benefits deemed negligible by the IRS, as found in Publication 15-B. Setting those aside to begin with will save you time.
- Calculate the total value of the fringe benefits. The most common method of assigning value to fringe benefits is the General Valuation Rule, which assigns a fair market value to each benefit provided. (The IRS permits other methods to value employee access to company cars.) Once you have the value of your fringe benefits, add them up.
- Calculate and subtract the value of business use. For items that serve both personal and professional use—we’re mostly talking about computers and cars here—the fringe benefit is only the personal use the employee got out of it. If you value an employee’s use of a company car at $20,000, and you estimate half of that was work, only count the personal half—$10,000—as a fringe benefit.
- Subtract exemptions. Some fringe benefits can be exempted completely. Others can be deducted below a certain threshold. For example: say you provided an employee $6,000 in educational assistance last year. The IRS guide states that $5,250/year can be exempted. The net imputed income will be $750. Make sure to get your insurance deductions; health insurance, disability insurance, and up to $50,000 of life insurance are exempt.
- Record in your payroll system. The resulting amount is the total taxable value of the fringe benefits you provided your employee, which is their imputed income. Enter that into your payroll system so it will show up on their W-2 and they can pay taxes correctly.
For extra credit, account for fringe benefits in your payroll withholdings during the next pay period. You can do that by anticipating the value of your fringe benefits and subtracting ([Taxable value of fringe benefits x Tax] / Withholdings Rate) from the employee’s paycheck. That way, they won’t have to pay out of pocket when they file their income taxes.
Why use T&E to deliver fringe benefits
You may not be able to deliver all your fringe benefits through employee expense reimbursement, but where possible, you do enjoy benefits.
One advantage is that value is already quantified. You don’t need to calculate fair market value when your employee purchased the benefit on the fair market in the first place. For example, suppose you’re paying for an employee’s online accreditation class. If you have them submit the registration fee as a reimbursable expense or put it on a corporate card, the fair market value of that benefit will be equal to the dollar amount of the expense.
Better yet, adding up individual expenses will be effortless. Automated expense management software makes it easy to categorize expenses and instantly pull up totals. With Abacus Live Reports, for example, you can sort by employee, by type of fringe benefit, by date, and so on. The tabulation is done automatically, error-free, and instantly.
Finally, processing fringe benefits with real time expense automation expenses ensures policy adherence. With reimbursements, you can automatically enforce thresholds for certain benefits and simply deny any expenses that come in for benefits you do not offer. Even if the expenses arrive via corporate card submissions, you’ll be able to keep an eye on what’s coming in and stop any expense abuse in its tracks.
Fringe benefits likely to be disbursed via T&E
Both taxable and non-taxable fringe benefits are common items in employee expenses. Here are a few examples:
Taxable fringe benefits in employee expenses
- Gym membership reimbursements
- Education assistance
- Personal use of a company car rented on a business trip (see our guide to “bleisure” travel for more)
- Moving expense reimbursement for moves under 50 miles
- Meal reimbursement done as an employee perk (and not for the employer’s convenience)
Non-taxable fringe benefits in employee expenses
- Moving expense reimbursement for moves over 50 miles
- Education assistance under or equal to $5,250/year
- Reimbursements for costs of one-off company picnics or outings (de minimis)
- Small perks like in-office coffee, snacks, etc.
- Commuting benefits (up to specific amounts)
Put imputed income on your paystubs
As with expense automation, many payroll systems will allow you to include imputed income on the paystubs your employees receive. They will also calculate tax withholdings automatically. If you use a payroll provider that allows this, including imputed pay on paychecks is a good way to be transparent with employees.
Abacus does not provide accounting advice. Speak with an accountant to determine the particular needs of your business.