The last thing a business owner wants is to be visited by IRS agents who utter that dreaded word: “Audit!” Last year’s Inflation Reduction Act increased the agency’s budget by about $80 billion over a 10 year period with over half that going toward enforcement. One of the objectives of this was to focus on “expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.” Reportedly, one of the ways they will be doing this is looking more closely at the reporting of “fringe benefits” by employers.
What Are “Fringe Benefits?”
The short answer, according to the IRS, is “A fringe benefit is a form of pay for the performance of services.” A lot of times an employer offers these fringe benefits in addition to salary as an incentive for employees; they can take the form of awards, prizes, gift certificates, use of company vehicles, and more.
Here’s the trick, though…some fringe benefits are taxable and others don’t need to be reported or taxed. Whoever handles your payroll has got to know the difference!
What’s Taxed…What’s Not?
It’s probably easiest to start with those specific categories of benefits that are NOT taxed. I’ll bet you know what the big one is: health insurance. If you are providing your employees health insurance…Great Job! And they don’t need to pay taxes on it, which is even better. Other non-taxable things you can provide employees are on-site meals and athletic facilities, adoption assistance, educational assistance, and disability insurance.
Once you get beyond those things, though, you need to report adequately and make sure withholding is done when possible…things like bonuses, group term life insurance, and the company car are going to be considered like income for the employees. So you have to make sure you document those items correctly for yourself and the employee.
Why Are Things Changing?
The IRS keeps track of something called “The Tax Gap.” Basically it’s the amount that is “true tax liability” and the amount that is paid on-time and in full. It is made of “the nonfiling gap, the underreporting gap, and the underpayment (or remittance) gap. Something in the neighborhood of about 85% of all owed taxes are paid on time; one of their new focus efforts is to increase that number and one of the areas they are focused on reportedly is fringe benefits.
It’s generally believed that fringe benefits present an opportunity for employers or employees to misrepresent or underreport their taxable income…whether intentionally or by accident. Increasing the scrutiny of these benefits during audits can reveal these errors and cause someone to have to owe more in taxes than they previously believed. If it’s found to be a systematic error by a company or their bookkeepers, that could lead to greater scrutiny of the business and the possibility of it being looked at as tax evasion.
How Should You Respond?
The first thing is to make sure you are properly reporting the fringe benefits you are providing to employees. And that includes non-taxable and taxable benefits. Make sure to provide solid documentation for both types and for each provided perk. The more documentation you are able to provide, the less likely that your company or your employee will attract closer scrutiny.
These matters can be extremely confusing and changes occur all the time. Unless your business is actually bookkeeping, you probably won’t be able to keep up with all the changes and updates, all while still performing the job that brings in the buck effectively. Because of that, we highly recommend you hire a bookkeeping service to do these things for you.
Southern Payroll & Bookkeeping keeps tabs on what needs to be recorded and reported…and why! Our team of experts will keep you in tax and regulatory compliance at local, state, and federal levels, all while allowing you to concentrate on the things that can make your company a success. Want to know more? Call us at 423-207-2497 and make an appointment to see how we can help you and your business!