Presented by Paystrubmakr.com By John Wolf and Tom Cullen CPA
Fringe Benefits and the Pay-Stub making.
Perhaps the term fringe benefits are somewhat of a misnomer since it connotates peripheral importance. With many companies expending over a third of their payroll on such items, they are hardly inconsequential.
Definition of Income – Section 61. The Code defines gross income as including “all income from whatever sources derived” and specifies that it includes “compensation for services” (section 61). The courts have stated that Section 61 is broad enough to include in taxable income any financial benefit conferred on the employee as compensation, whatever the form or mode by which it is affected.
Deductions without Taxable Income: However, certain fringe benefits can provide an unusually tax-favored manner of supplementing the compensation of key executives. In such cases, benefits received under them are not taxable to the executive, while the cost of providing them is currently deductible to the employer.
Types of Benefits:
Old Dichotomy – Statutory or Non-statutory. Formerly, there were two basic types of fringe benefits provided to the highly compensated employee. The first group of benefits was that specifically permitted by statute. The second type had developed over the years under a wide variety of plans that had no specific basis in the Code. These non-statutory benefits usually involved the payment of a particular expense by the employer or the provision of goods and services to the employee. Through a long series of cases, rulings, and administrative customs, each of these plans had developed its own status as to taxability.
Fringe Benefits Provisions: In 1975, the IRS issued proposed regulations for determining when non-statutory fringe benefits were taxable as compensation. Congress prohibited the issuance of such regulations that would be effective before 1984. TRA ‘84 – Section 132
The Tax Reform Act of 1984 scrapped the moratorium for all fringes, other than faculty housing, by providing statutory rules for excluding certain fringe benefits from an employee’s income.
The excluded fringes include:
(1) No-additional-cost services;
(2) Qualified employee discounts;
(3) Working condition fringes; and
(4) De Minimis fringes Discrimination.
Under §132, no-additional-cost services, employee discounts, eating facilities, and tuition reductions, must be provided on substantially the same terms to each member of the group of employees which is defined under a reasonable classification set up by the employer that does not discriminate in favor of officers, owners, or highly compensated employees.
Note: Neither working condition fringes nor the minimum fringes are subject to anti-discrimination provisions. Only Statutory Benefits. Any fringe benefits that do not qualify for exclusion under §132, or any other provision, are taxable for income and employment tax purposes.
No-Additional-Cost Services – Section 132(b) The entire value of any no additional cost service provided by an employer for an employee’s use is excludable from gross income (Section 132(b) & Temp. Reg. Section1.132-
1T). The exclusion applies if:
(1) The employer incurs no substantial cost (including foregone revenue) in providing the service (Reg. Section 1.132-2T.);
(2) The service is provided by the employer (or another with whom the employer has a reciprocal arrangement) and is of a type provided to its non-employee customers;
Paystubmaker/ The service is provided to current or retired employees (and their spouses
or dependent children), and Certain nondiscriminatory requirements are met.
Under this provision, employers may furnish railroad or airline seats, or hotel
accommodations for employees if customers are not displaced and no substantial
an additional cost is incurred.
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Disclaimer: John Wolf and paystubmakr.com are making a total effort to offer accurate, competent, ethical HR management, employer, and workplace advice. We do not use the words of an attorney, and the content on the site is not given as legal advice. The website has readers from all US states, which all have different laws on these topics. The reader should look for legal advice before taking any action. The information presented on this website is offered as a general guide only.