Taxes on Fringe Benefits

Fringe benefits often present unique challenges when it comes to collecting employee taxes for a couple of different reasons:

1. They are often non-cash wages, so taxes can't be deducted from the fringe benefits themselves.
2. They are often calculated and reported after all cash wages have been paid to the employee for the given calendar year.

Even so, taxes often must be collected and reported related to these earnings. You can slide by without recording extra taxes when it's something like S-Corp Shareholder Insurance that's only taxable for Federal and State Withholding since those don't have to balance in any particular way on the W-2, but benefits that are taxable for FICA and Medicare must have FICA and Medicare taxes recorded at the time of reporting so that your 941 filings stay in balance.

Here are some options we often see employers use:

1. Make sure benefits are calculated and reported on or before the employee's last cash paycheck so that the extra taxes due can be deducted from cash earnings.
2. Gross-up the benefits and pay the taxes on the employees' behalf.
3. Offset the extra FICA and Medicare taxes by re-allocating Federal Withholding taxes already paid by the employee.

In the end, your goal is to make sure that the earnings reported in Boxes 3 and 5 on the W-2 balance to the taxes reported in Boxes 4 and 6. The FICA reported in Box 4 must be 6.2% of the wages in Box 3, and the Medicare in Box 6 must be 1.45% of the wages in Box 5.*

Once you and your accountant have calculated the benefits you need to have reported, our service team is happy to help you properly report them in iSolved to ensure correct reporting and payment of the associated taxes. You can contact customerservice@dominionpayroll.com for assistance.

*Note: if the employee has earns more than $200,000 in the tax year, the Medicare rate on the wages over $200,000 goes up to 2.35%.