As many small business owners know, ignoring the small stuff is sometimes dangerous; small problems can become big ones and ultimately hold you back from accomplishing your goals.
One such issue is employee fringe benefits. But you can ensure this won’t become an impediment to long-range success by creating an effective system.
Advances and reimbursements
In addition to wages, your employees likely receive other types of payments. Accounting for each of these events depends upon the processes involved and the rules apply, even if you are the only employee.
Some payments are considered taxable fringe benefits, and these are treated the same as wages; income tax withholding and payroll taxes apply, and the amounts are included on payroll reports.
Corporations must receive substantiation for expense reimbursements to avoid having to report the payments as taxable fringe benefits. Even sole proprietors and partnerships must document expenses paid as reimbursement to business owners. Without supporting evidence, cash outlays are treated as owner or partner withdrawals of taxable profit rather than deductible business expenses.
Reimbursement made under the rules for an accountable plan is not considered income for the recipient. Corporations establish accountable plans by reimbursing only reasonable expenses that have a business connection, maintaining adequate records and assuring that employees return any advances in excess of incurred business expenses.
The same standards apply to proprietors and partners claiming tax-deductible expenses for amounts their businesses pay to them as reimbursements. Small businesses can escape serious aggravation by avoiding cash advances and only reimbursing costs that are supported by receipts.
Several exceptions exist. Ensure you discuss with your accounting professional the types of reimbursement your business provides.
Most employee gifts are considered taxable compensation. However, those employee gifts that meet the de minimis exception are not taxed. These extremely small gifts are excluded from treatment as taxable employee fringe benefits. The primary factor in identifying a de minimis gift is that accounting for it is unreasonable or administratively impractical based upon its value and frequency.
Exceptions for de minimis gifts only apply to non-cash items. Gifts of cash to employees are always considered taxable compensation. This includes cash equivalents such as gift cards.
Awards and discounts
Employee achievement awards dodge treatment as taxable gifts if they comprise tangible property given for length of service, productivity or safety. The average awarded amount per employee cannot exceed $400, and no employee can receive more than $1,600 in a year.
Awards for other purposes are also exempt when no single employee receives more than $400 annually. To qualify for this exemption, the awards must be governed by a written plan that doesn’t discriminate in favor of highly compensated employees.
Employee discounts are not a taxable fringe benefit as long as items are sold to employees for at least the company’s gross cost. Non-taxable discounts may also extend to spouses and dependent children of employees.
Create an effective system of accounting for employee fringe benefits, and you’ll avoid being derailed on the road to success.