May 07, 2024

Employee Compensation: Reporting All Of It

The pay that employees receive encompasses more than just their salary, overtime and bonuses. You can’t forget about other monetary benefits, like sales incentive gifts or even gift cards for a job well done. Read through to learn that failure to report to the IRS the smallest of employee benefits could result in penalties and tax liabilities.

The majority of — if not all — employers understand that they must report the salary, overtime pay and bonuses that their employees receive as compensation for the jobs they perform. But did you know that the IRS also wants to know about other forms of taxable compensation?

What are examples of taxable compensation?

In the eyes of the IRS, other forms of taxable compensation beyond the obvious include commissions, stock options, equity awards, company property — like cars — for personal use, and various rewards, like gift cards or travel perks.

Do you need to report these forms of compensation?

Yes, you must report these forms of compensation as part of your payroll. According to the IRS, you are required to withhold federal income, state income, Social Security and Medicare taxes on even the smallest of gifts or awards granted to an employee. If you fail to do so, you run the risk of facing tax filing penalties not only for your company but for your employees, too.

Where to find more information

To read more about the tax treatment of these other forms of employee compensation, refer to the draft of Publication 15-B, Employer's Tax Guide to Fringe Benefits for 2024. Located on the official IRS website, this draft summarizes the different ways that fringe benefits are treated in the context of federal income tax withholding, Social Security, Medicare (FICA), and federal unemployment tax (FUTA) purposes.

The rules governing taxable fringe benefits contain discrepancies and idiosyncrasies that can seem counterintuitive, but this draft outlines the specifics for you. For instance, payments from an employer’s adoption assistance plan are not affected by federal income tax withholding rules. However, they are taxable under FICA and FUTA regulations.

Exceptions and limits to keep in mind

In most cases, benefits pertaining to employee commutes and transportation are excluded from taxation, though this is not always the case. For example, for tax purposes, commuting expenses when the mode of transportation is bicycling will be included in the employee's gross income.

Now, if an employee drives a company car for both personal and business purposes, the employee’s personal use needs to be separated from his or her business use of the car. When it comes to personal use, the mileage is taxable. Similarly, any employee bonuses or awards extended as the result of outstanding work are usually taxable to the employee.

While small gifts might not be taxable, they tend to adhere to de minimis rules for benefits that are not consistent. Due to the occasional nature of this type of compensation, it would be nearly impossible — not to mention unreasonable — for accounting departments to monitor these benefits and keep track of them all.

That said, as with most matters, there are exceptions. For instance, gift cards are never exempt under de minimis rules, even if the gift cards are for less than $25. Instead, this type of compensation is taxable to the employee.

Everything we have touched on thus far includes tangible items that can be used for various purposes, but what about meals that are occasionally offered to employees? As an example, if you make coffee and donuts available for a meeting or you throw a picnic for a company event, these benefits might be eligible for the de minimis exemption.

And if you have a cafeteria on company property? Believe it or not, it might still fall under the de minimis category for employee tax purposes depending on the specifics. For better clarity, refer to the de minimis meals section of the IRS’ Publication 15-B.

Moving-related expenses paid to the employee are also considered a taxable benefit. Say your business has an accountable plan that not only distributes moving costs but also keeps track of them on behalf of employees. Such moving expenses are still taxable for the employee.

For tax purposes, you are required to use the general valuation rule to determine the value of benefits that your employees receive. Under this rule, the value of the benefit is based on the fair market value. This means that employees who receive benefits are required to report the amount of money they would need to pay a third party for the benefit in question.

Taxable employee compensation can be complicated, so it wouldn’t hurt to consult payroll processors or tax advisors for insight when providing benefits to employees. Reference Publication 15-B for the applicable tax year while you’re at it.