Rules for Reporting and Withholding for Fringe Benefits
Withholding, depositing, and reporting of the value of fringe benefits carry a set of rules that are different due to the nature of fringe benefits and how they are valued. The IRS allows you to determine the estimated value of fringe benefits prior to January 31 for the purposes of withholding and depositing on time.
Choice of Period
The employer has a great deal of flexibility in deciding on reporting and withholding for tax purposes, including:
- Taxable non-cash fringe benefits can be treated as paid on a pay period, quarter, annual, semiannual, or other basis.
- They must be treated as paid no less frequently than annually.
- You can use different pay periods for different employees.
- You can change the pay period as desired if all benefits are paid by December 31 of the calendar year.
Transfer of Property
Transfers of real property, property held for investment, or cash fringe benefits must be reported as having been transferred on the actual date the property is transferred to the employee.
Withholding and Depositing Taxes
Three basic rules apply to withholding and depositing of taxes for fringe benefits:
- You can add the value of taxable fringe benefits to regular wages and figure withholding on that value in the pay period when reported.
- As an alternative, you can withhold federal income tax on the value of the fringe benefits at the flat 22% rate used to report supplemental wages.
- You must withhold the appropriate income, social security, and Medicare taxes on the date or dates you chose to treat the benefits as paid.
Amount of Deposit
The amount you deposit is calculated the same as you would cash wages, except that now you would use the value of the taxable fringe benefits on the date or dates they were provided. Even if you do not know which employee is to receive a fringe benefit, you still make the deposit on the date it is due. Should you underestimate the value of the fringe benefit and make a short deposit, you could be liable for a penalty.
Special Accounting Rule
The special accounting rule allows you to treat taxable non-cash fringe benefits provided in the last two months of the calendar year as paid in the next year. This applies for periods shorter than the last two months in the calendar year as well. Example: Taxable fringe benefits provided in late November 2021 could be reported as provided in 2022. The special accounting rule cannot be used for real property or investment property fringe benefit transfers.
Use of the specialty accounting rule is an option, and you can use it for some fringe benefits while not for all of them. The period of use can be different for different fringe benefits as well. If you use the rule for a fringe benefit, you must use it for all employees that received the benefit.
Determination and Reporting
The actual cash value of fringe benefits provided during a calendar year or using the special accounting rule must be determined by January 31 of the following year. The actual value is reported on Form 941, 943, or 944 and form W-2.
This overview should provide enough information for you to use in a discussion with your tax professional or accountant.