Employers often give their employees a wide assortment of fringe benefits such as child care or stocking a fridge with snacks in order to encourage them to remain with the company. While these benefits may not have specific dollar values to employees, the IRS treats fringe benefits like income. Unless otherwise specified in the tax law as excludable, fringe benefits are considered taxable.
Common fringe benefits subject to taxation:
Health Insurance
Vacation/Leave/Holiday Pay
Employee Discounts
Meals and cafeteria plans
Transportation benefits
Gym Memberships
IRAs and other retirement plans
Childcare/dependent care services
Exclusion rules for fringe benefits
Some fringe benefits, in its entirety or in part, may be excludable from taxable income. This exclusion applies to federal income tax and in most cases also from FICA, Medicare, and FUTA taxes. The IRS has many specific rules depending on the kind of fringe benefit and at certain percentages or set dollar amounts listed in Publication 15-B. Here are some common ones worth noting.
Accident and health benefits (not including long-term care) are exempt from federal income, FICA, Medicare, and FUTA taxes.
Meals are exempt from federal income, FICA, Medicare, and FUTA taxes if furnished on your business premises or are considered ‘de minimis’.
Dependent care benefits are exempt up to a limit of $5,000 ($2,500 for married filing separately).
Athletic facilities may be exempt if used substantially during a calendar year and if the facility is operated by the employer on premises owned or leased by the employer.
General Valuation Rule
For the most part, as an employer, you will need to use the General Valuation Rule when determining the value of most fringe benefits. General Valuation Rule is the rule that the value of a fringe benefit is determined by its fair market value. Fair market value is based off of the amount that you as an employer would charge an unaffiliated 3rd party for a specific fringe benefit.
Reporting and withholding fringe benefit taxes
Values of fringe benefits can be added onto the regular wages of a payroll period for an employee and the correct amount to withhold for federal income tax can be calculated. You also have the option of separately withholding fringe benefits for income tax at a flat 25% rate (the same rate that applies to supplemental wages).
These are just some general insights about fringe taxes and how employers should factor them in for taxation purposes. Depending on the fringe benefits your company offers employees, it may turn into a labyrinth of rules to navigate. Such detail needs a familiar set of hands to help with. Luckily, that is where we can come in to help! MiklosCPA is a Los Angeles-area CPA firm focused on helping businesses with their accounting and tax needs. We use a mix of online bookkeeping services and personalized communications to help your business manage the accounting so that you can focus on building the business. If you are interested in learning more about our services, contact us! Or if you enjoyed this article, follow our social media for future tax tip and other “good to know” articles.
Do you own a business, or at least have thought about running one? There are lots of steps involved in setting up a business, but for this article series, we will take a look at employee taxes. As part of the duties of managing a business, employers are also responsible for their employees and the taxes that are connected with retaining them.
Employees
Put briefly, employees are defined as workers that an employer has the right to control over the kind of work to be done and how that work will be done. All employees are subject to payroll taxes (Social Security, FICA, etc.) with someexceptions. For example, children under the age of 18 who do minor domestic work for their parent’s business, such as cleaning, may not be subject to payroll taxes if the business is a sole proprietorship or partnership.
New employees have to submit to their employers a IRS Form W-4 to indicate their tax filing status (single, married, etc.), and any allowances and exemptions to determine the amount of wages an employer will have to withhold for federal income taxes.
Wages and Other Compensation
Wages paid to employees are subject to the federal income tax. This includes bonuses, salaries, vacation pay, allowances, tips, and other forms of supplementary payments that are not necessarily cash. These supplemental wages and other compensation to employees will need to be reported on Form 941.
Form 941
Form 941 is filed quarterly with the IRS to report wages and other types of compensation paid to employees along with reporting the amounts of tax withholding an employer makes towards federal income tax, FUTA, and other payroll taxes.
Payroll Period
This is the general period of time set for paying wages. Biweekly is the probably the most common example of a payroll period, but employers may have monthly, weekly, or even quarterly payroll periods. The kind of payroll period will also determine how withholdings are calculated. Taxes for employees are withheld for that period regardless if the employee worked the entire period or not. For employees who do not have a regular pay period, such as employees paid on sales commissions, withhold the tax as if wages were paid on a regular pay period by counting back the days (including weekends and holidays) back to their last wage payment in the same calendar year.
In the next part of this series, we will go over some of the finer details in calculating the amounts of tax withholding from employee’s gross pay. Follow us on our social media pages to be up to date when we post the next article in this series, and for future tax tip articles!
Employee taxes can get complicated and time consuming for businesses to take care of on their own, so that is where we come in. MiklosCPA provides accounting and tax advising services for small business owners so we can take care of your accounting while you grow the business.
We’ve got it covered, so you can charge on ahead! If you’d like to learn more about our services, contact us!
For the last part of this series, we will be looking at the additional federal payroll taxes tied to employee wages and the procedure for properly depositing employee tax withholdings to the IRS.
Social Security Taxes – FICA and Medicare
The Federal Insurance Contributions Act (FICA) payroll taxes, commonly referred to as the social security taxes, are the taxes used towards funding Social Security and Medicare. The government draws FICA and Medicare taxes from both employee’s and employer’s gross earnings.
The current tax rate for FICA in 2017 is 6.2% for both employees and employers (for a total tax rate of 12.4%), and the Medicare tax rate in 2017 is 1.45% also for both employees and employers (for a total rate of 2.9%). Employers must withhold the correct amounts from their employee’s gross pay to pay their employer’s share of the social security taxes. The FICAtax has a wage cap set at $127,200 for 2017. This means that FICA taxes will be only taken out of the first $127,200 an individual or employer will earn. There isn’t a wage cap set on Medicare taxes though. In fact, there’s an Additional 0.9% Medicare Tax for high earners making more than $200,000 (Single) in a year.
Unemployment Insurance Tax
The Federal Unemployment Tax Act (FUTA) imposes an additional payroll tax on employers (but not on employees) to help fund federal unemployment programs administered by the states. The current FUTA tax rate is 6.0% for 2017 and is applied to the first $7,000 earned by employees. However, employers can claim a federal tax credit of up to 5.4% on FUTA taxes (depending on state unemployment tax rates), so in reality the actual tax paid federally may end up being only 0.6% of the first $7,000 earned.
Depositing Payroll Taxes
Generally, employers must deposit payroll taxes (federal income tax, FICA, Medicare, FUTA) periodically. The IRS requires these withholdings be deposited electronically through their Electronic Federal Tax Payment System (EFTPS) system. There are two deposit schedules, monthly and semi weekly. Which schedule you follow is based on your total tax liability you reported on your IRS Form 941 in a lookback period, usually quarters of the previous calendar year.
Each employer’s tax situation is different, so having knowledgeable support will be nothing but beneficial. MiklosCPA supports clients with their back office accounting and taxation needs using modern, cloud-based software with the personalized touch of frequent communication. If you are interested in learning more about our services, do not hesitate to contact us.
We also post tax tip articles like this periodically on a whole host of topics related to taxation. If you found this series of articles useful, follow us on our social media pages for future articles and share them with colleagues and friends!
For the second part of this article series for employer tax tips, we will be focusing on the procedure to calculating payroll tax withholdings from employees. States and municipalities can impose their own additional payroll taxes, but for this piece we will be focusing solely on the federal level, which entails wage withholdings for the federal income tax, Federal Unemployment Tax Act (FUTA), Social Security (SS), and Federal Insurance Contribution Act (FICA) tax.
New employees must submit to employers the completed IRS Form W-4, officially named the “Employee’s Withholding Allowance Certificate”, because it notes any allowances or exemptions to be claimed and will affect how their withholdings will be calculated. For example, if your employee has dependent children under their care or happens to be working multiple jobs, the calculation on your withholding from that employee’s wages will need to be adjusted.
Third Party Payroll Tax Arrangements
Employers can opt for outside contractors, such as payroll service providers like Paychex, to handle payroll taxes and proper withholdings for them. However, the employer will still be responsible for the proper withholdings and any tax liabilities.
Figuring Federal Income Tax Withholdings
There are different ways to calculate income tax withholdings from employee wages. Two of the most used methods are the percentage method and the wage bracket method.
Wage Bracket Method The wage bracket method is probably the simplest method in calculating income tax withholdings. The IRS has laid out tables based on the filing status (single, married, etc.), the payroll period (weekly, biweekly, etc.), and range of income earned in the period to determine the amount of wages to be withheld. Using the info from the employee’s W-4, use the correct table to find the amount to withhold. The tables can be found in IRS Publication 15. Below is a sample section from a table to illustrate how they appear.
Wage Bracket Method Tables for Income Tax Withholding
SINGLE Persons—WEEKLY Payroll Period
(For Wages Paid through December 31, 2016)
And the wages are–
And the number of withholding allowances claimed is—
At least
But less than
0
1
2
3
4
5
6
7
8
9
10
The amount of income tax to be withheld is—
80
85
4
0
0
0
0
0
0
0
0
0
0
85
90
4
0
0
0
0
0
0
0
0
0
0
90
95
5
0
0
0
0
0
0
0
0
0
0
95
100
5
0
0
0
0
0
0
0
0
0
0
100
105
6
0
0
0
0
0
0
0
0
0
0
Percentage Method Based on the filing status, payroll period, withholdings, and a range of income, a percentage is applied to the wages earned to determine the amount of income tax withheld. The percentages and withholding amounts can also be found on IRS Publication 15.
Let’s use an example to illustrate the methods.
Jorge works for a biomedical supplies firm based out of Irvine, CA. He is single and claims only one personal withholding on his W-4. The firm pays him biweekly and each paycheck is $750.
Using the wage bracket method, we look at the IRS table from Publication 15 for single, biweekly pay and look in the wage range of “740 to 760” and find that based on his one withholding that his income tax to be withheld is $58.
Using the percentage method, we start with his gross pay of $750 then refer to IRS Publication 15 for the amount to subtract for his one withholding based on his filing status, in this case it is $155.80 for a single person paid biweekly. Then we take the amount ($750-$155.80=$594.20) and refer in the publication to the appropriate percentage table Jorge’s biweekly pay falls under, which in this case is single, biweekly and an income above $443 but not above $1,535. The withholding amount is listed as “$35.60 plus 15% of the excess above $443.” So now we take Jorge’s wages after the withholding amount and subtract it to get the ‘excess above’ $443 ($594.20-$443=$151.20). Finally, multiply that number against the percentage ($151.20 x .15=22.68) and add it to the withholding amount ($35.60+22.68=$58.28). The amount to be withheld is approximately the same as the wage bracket method.
The wage bracket is a far simpler and less time-consuming method, but the percentage method may be more useful for those with higher income or those with many withholdings that may not be included on the IRS tables.
Stay tuned for last part of this series on employee taxes! We will be going over the other parts of employee federal payroll taxes, FUTA, FICA, and social security taxes.
Figuring out federal income tax may seem a bit challenging at first, but practice breeds familiarity and confidence. It may be even more helpful if you had a trusted tax advisor make sure those withholdings are done right. We would be glad to assist you with that! MiklosCPA is a California-based accounting and tax advisory firm who has helped many clients with their taxes and accounting. If you would like to learn more about our services, contact us!
Nonprofits may not pay Federal incometax,but they are often subject to payroll, sales, and other taxes at the state and city levels. For this article, we will be looking at payroll taxes that nonprofits may still be required to pay for having employees.
Nonprofits are subject to all the same employee taxes businesses are taxed on. Employee earnings are still subject to FICA and Medicare taxes while the nonprofit business is still subject to FUTA in addition to the FICA and Medicare taxes. Nonprofits must withhold the right amounts from their employee’s gross pay for the taxes related to payroll.
Generally the same rules and amounts for payroll tax withholdings apply to employees of nonprofits. Of course there are some exceptions. For example:
Employees of nonprofits paid less than $100 in a year.
Churches or church-controlled organizations opposed, for religious reasons, to paying into social security taxes AND has filed their Form 8274 for the exemption. Employees of organizations like these must file their taxes as if they were a self-employed individual, which would mean getting “double taxation” for both the employee and employer share of payroll taxes.
Special rules may apply for ministers and members of religious sects. Certain recognized sects and members of religious orders that take up vows of poverty can claim an exemption from self-employment taxes for their earnings, such as allowances they may have or personal donations received. To apply for the exemption, file IRS Form 4361.
Hopefully this was a bit of a useful ‘good to know’ piece about how nonprofits still must handle payroll taxes. If you are interested in learning more details surrounding employee taxes, I recommend viewing our article series on employee payroll taxes: Part 1, Part 2, & Part 3. We post articles like this and other pieces regularly for our readers and clients. Follow us on our social media pages for future updates and new topics!
Employee taxes are just one aspect a business owner handles while running a business. Having a trusted supporting team to help with the nuances of payroll and the taxes that follow it lightens the load and can allow an owner to focus on growing the business. That is where we can come in and help. MiklosCPA is an accounting and tax advisory firm that has helped businesses with their taxation and accounting needs. If you would like to know more about our services, contact us!
In order to carry out their operations, employers often have both employees and independentcontractors. In small businesses, due to their size and workload, the lines may blur between how employers decide who are employees and who are independent contractors. Some businesses may even wrongly classify workers as independent contractors to avoid paying employment taxes.
In recent years, the IRS has been cracking down on small businesses who do not properly classify their workers. They forced businesses to pay back taxes on employment taxes and additional penalties. The IRS set a list of criteria for determining if workers are employees or independent contractors, but ultimately the individual circumstances are considered by the IRS when evaluating a company’s classifications. Nevertheless, here are some general tips to consider regarding your workers to help you properly classify them and avoid clashing with the IRS.
Control over the work done
Generally, if the employer can only control the results of the work that was completed, the worker is considered an independent contractor. However, if the employer provides training, or extensive and detailed direction in how work is to be carried out for a worker and can control the process as the work is done, the worker will likely be an employee. An example of an independent contractor would be a Lyft driver. The company can only control the result (a customer is driven to their destination), but not how the work was done, which is up to the independent contractor (the driver, their vehicle, and how the customer got to the destination).
Financial Control
How a worker is compensated is also considered a determining factor. If the worker has an opportunity for profit or loss, then they are likely an independent contractor. Businesses that do not reimburse a particular worker for expenses incurred may also indicate that worker may be an independent contractor. Going back to the Lyft example, drivers are not reimbursed for expenses related to auto repairs on the vehicles they use, therefore indicating Lyft drivers are treated as independent contractors.
Relationships of Parties
Workers who receive some kind of benefits from the employer are most likely employees. Independent contractors are often only paid on some specific agreement or contract for certain work to be done.
Lets take a look at an example with these considerations:
A small accounting firm in Westminster, CA hires IT help from Orange Coast PC, a sole proprietorship run by Bob Jimenez. He only comes in when needed to help with IT issues on their computers and other electronics, per the terms of their contract.
This is a fairly straightforward and common example of independent contractor-business relationships. The company defined the work terms, so Jimenez only comes in as needed. However, consider the same example, but with these additional details.
Bob Jimenez starts off doing IT work for the CPA firm as needed. The firm needs to develop its own accounting software and requests Jimenez for additional programming work. The software project takes longer than expected, so the firm provides Jimenez a workspace to help him with his work. Jimenez ends up being unable to work with his other clients and focuses most of his time doing work for the accounting firm.
In these additional circumstances, the IRS may look at these details and argue that Jimenez is an employee and not an independent contractor because he spends a significant amount of time working for one firm. In addition, Jimenez does work not in his original agreement and has a workspace provided by the firm. The burden has shifted to the business to prove otherwise through their records and paperwork.
Employee/independent contractor lines get complicated. Our services at MiklosCPA can help with clarifying those lines. We are a California-based CPA firm that supports our clients with their accounting and taxation needs with modern cloud-based accounting systems and the personal touch of individualized, periodic communications. If you would like to learn more about our services, contact us! Or if you enjoy this article, follow us on our social media pages for future updates and new posts!
MiklosCPA is a top-rated cloud-based Certified Public Accounting firm in Los Angeles, Orange County, California serving small businesses and start-ups.
