Compensation, Taxes, And Benefits: What Should You Discuss With Employees
One way to avoid employee and employer conflicts is by educating employees about their compensation, benefits, and taxes. Employers must provide basic and fringe benefits to stay competitive and retain more employees. Proper expectations must be set to avoid facing legal issues later on. Take the time to discuss the different benefits, compensation, and taxes that apply to your employees with the help of your HR department.
Learn more about employee benefits, compensation, and taxes below.
Employers must assume that all forms of compensation, such as money and gift cards, paid to employees are taxable wages for payroll tax purposes. State and federal payroll tax laws identify taxable income as employee’s wages, which encompass virtually every payment for services rendered. But there are exempted payments from taxation.
Employers should discuss taxable compensation to employees and make them aware that it is considered a taxable wage payment whenever something of value is transferred to an employee for services. With the assistance of your HR team, discussing the taxable compensation to your employees will prevent problems with the IRS and clarify all concerns and questions.
Here are some examples of taxable compensations:
- Fringe Benefits: According to the IRS, these benefits are not excluded under taxable wages, and employers may have to pay the taxes according to the fringe benefit’s fair market value. Learn more about fringe benefits in the succeeding section.
- Advances: All payments employers make to employees for services that will be performed in the future are considered taxable wages. Of course, if workers are legally obligated to repay any advanced amounts, this is the only time that advances are not taxable.
- Gifts: Gifts employers give to employees are a form of compensation. It only becomes nontaxable if the gift is unrelated to the business or related to an event, such as holiday and wedding gifts. However, small gifts of cash do not qualify for the exception.
- Prizes and Awards: All prizes and awards given to employees for safety-achievement and length-of-service are considered taxable wages. However, non-cash prizes or awards are not taxable if the value is $400 or less.
- Business Expense Reimbursements: All business expense reimbursements are taxable unless employers make reimbursements and advances under an accountable plan. An accountable plan should meet certain requirements. Reimbursements should be given for deductible business expenses paid by an employee while performing their duties and responsibilities. The employee should provide proof of time, use, business purpose, and amount of money used. Any change or excess of reimbursements must be returned to the employer within a reasonable time.
Fringe Benefits Explained
Federal law includes a list of fringe benefits or work perks employers can provide to their employees without incurring any tax obligations. Improve your employees’ way and quality of life by offering fringe benefits also to benefit your business. When employees receive more than their pay, such as de minimis and privileges, they’re more motivated to work. It means more tasks are accomplished and more revenue generated for your business.
Here are some examples of fringe benefits excluded from taxable wages:
- Health plan payments
- Contributions of employers to a qualified retirement plan or pension
- Worker’s compensation benefits and premiums
- Benefits with minimal value or de minimis (e.g., use of company cell phone for personal purposes, occasional tickets to sporting events, or occasional taxi fares or supper money for employees who worked overtime)
Taxable Or Non-taxable
Tax and employment laws are complex. That’s why many employers and employees encounter problems due to misunderstandings about whether compensation is taxable or not. Employers must ensure that their employees fully understand which part of their compensation are taxable or non-taxable. By doing so, they can budget their pay properly, given the anticipated amount based on worked hours and the number of paid leaves left or rendered.
Check out the following examples:
- Jury Duty Pay
The amount an employer pays for an employee serving on jury duty is considered taxable wages even though the payments apply for periods when the employee is absent from work. The taxable amount varies depending on how the jury duty pay is treated.
Check the following scenarios:
- If the regular wages are reduced by jury duty pay, then payroll taxes apply.
- If the employer pays the regular wage, but requires the employee to give the jury pay to the company, payroll taxes would apply to the difference of the regular wage amount and the jury duty pay.
- For employees who are allowed to keep the jury pay and receive a regular wage, payroll taxes only apply to the regular wage amount.
- Vacation Pay
All vacation pays are taxable compensation. The same rule applies when employees don’t take vacations and receive additional payment instead.
- Tips and Gratuities
All money tips or cash tips employees receive from customers constitute taxable compensation for tax purposes. On the other hand, non-cash tips, like movie or concert tickets, are not considered wages.
Your business might have a mandatory gratuity, such as a 10 percent gratuity for a restaurant business, which is distributed to your employees. It’s considered a service charge that constitutes taxable compensation upon distribution.
- Non-Cash Wages
The amount taxable for non-cash wages is based on the fair market value of the property or benefits at the payment time. Fair market value refers to how a person would pay for an unrelated third party to receive comparable benefits.
- Compensation for Casual Labor
Employers may pay employees to do tasks that don’t promote and advance the company. For instance, employers may pay employees to do household work when the business is slow, like paying a company computer technician to set up a personal computer at home. These payments won’t constitute taxable wages. Also, non-cash payments for casual labor are nontaxable.
Discussing the employment mentioned above topics is important to clarify common employee questions about pay, taxes, and benefits. Employers are responsible for explaining information employees should know to help them assert their rights and ensure they’re happy and satisfied working in the company.
Educating your employees about taxable and non-taxable wages is crucial to avoid raising any doubts or facing legal consequences later on. It’s also one way to give assurance and peace of mind to your employees. You show them that they’re dealing with a trusted company, and they can work in your company for the long-term to grow and advance their career.