When Do You Withhold Taxes on Fringe Benefits?
Taxable fringe benefits may be CASH or NON-CASH benefits, but either way they are normally subject to employment tax withholding. The question then is WHEN to withhold the taxes.
The employer may elect to treat fringe benefits as paid by the pay period, quarterly, semi-annually, or on another basis, but withholding on the fringe benefit must occur no less frequently than annually. Conversely, the employer may also treat the value of a single fringe benefit as paid on one or more dates within the same calendar year, even if the employee receives the entire benefit at one time.
The employer has other options, too, provided the fringe benefit is not a transfer of tangible or intangible personal property of a kind normally held for investment, or the transfer of real property. For example, the payment date selected for a particular type of fringe benefit does not have to be the same for all employees. Later, the employer can change that date, provided it treats all benefits furnished in a calendar year as paid no later than December 31 of that calendar year. IRS approval of such changes is not required, and notification to the IRS of such elections is not necessary.
Generally, by January 31 of the following year, employers must determine the ACTUAL value of fringe benefits furnished to employees. But, under a special rule, the employer may elect to treat fringe benefits that actually are provided in November and December, as paid in the following year.
Naturally, employers who make this election must notify affected employees, since the employees must use the same rule in accounting for related deductions. The notification must occur at or before the time that Form W-2 is provided to the employees. Again, the employer does not have to notify the IRS of the election, and the election can be changed without IRS approval, as long as the appropriate amount of income is reported for the change period, and the applicable taxes are withheld and deposited.
Note that for certain types of non-cash fringe benefits the IRS provides special valuation rules. For example, special valuation rules exist for personal use of a company car, chauffeur services, personal flights on company aircraft, and meals provided at an employer-operated eating facility.
Employment taxes withheld on taxable fringe benefits must be deposited in the same manner as taxes withheld on cash wages. Before the payment date, the employer may make a reasonable estimate of the value of fringe benefits provided in order to make timely deposits. Also, the actual value of the fringe benefit and its related tax liability must be reported on Form 941 (or other employment tax return) for the reporting period in which the benefit is treated as paid.
For more information on payroll tax withholding, contact our accounting team at (510) 235-1044.