Tax Consequences of Employer Provided Fringe Benefits

If you operate a small farming business in Placer County, you might offer to pay for your employees’ housing, pay them with commodities (instead of wages), or provide them with the occasional meal or use of a business vehicle to commute to and from work.

While you and your employees might consider them to be “on the job perks,” the tax code has a different name for them: fringe benefit and they may be subject to taxes.

Taxes are probably the last thing on your mind when all you are trying to do is be a decent employer to your hard-working employees. After all, you’re a farmer—not a tax specialist—who just wants to grow crops, raise livestock, sell your products at the market, and earn a living.

If you operate an established farming business, chances are you already know about the tax consequences of providing your employees with other types of fringe benefits like the ones noted above. And, you’ve already discovered that the best way to find and keep valuable employees is to offer the best compensation package possible—and that usually includes tax-free fringe benefits to your employees such as medical coverage, disability, life, and long-term care insurance benefits, or educational assistance.

In fact, if you’ve been working with a CPA for farmers, like Cook CPA Group, then you’ve probably set up your business as a C-Corporation because that type of business entity allows you to take advantage of the greatest number of tax-free fringe benefits—including full deductibility of employee health insurance benefits.
But if you’re just starting out, what you might see as acts of kindness such as letting an employee borrow a farm-owned vehicle or paying for accommodation in town might result in unintended tax consequences that aren’t so kind to your employees’ bottom line—and could possibly get you in trouble with the IRS too.

The Roseville accountants at Cook CPA Group, we’ve seen the confusion farmers like you have regarding taxation of fringe benefits once too many times. As a CPA for farmers, we’re here to set the record straight about the tax consequences of employer-provided fringe benefits. Let’s take a closer look:

What Is a Fringe Benefit?

A fringe benefit is a form of payment for the performance of services. Generally, the recipient is an employee but doesn’t have to be. For instance, an employee could be the recipient of a fringe benefit provided by you, the employer, to a member of the employee’s family. He or she could also be an independent contractor, partner, or director.

Examples of fringe benefits that farmers might provide to their employees, including a quick look at who is taxed—or not:

• Business vehicle for personal use – taxable to employee recipient
• Commodity wages where the employee is paid for farm work in bushels of grain or livestock –100% taxable to employee recipient, but not subject to a payroll tax
• Employer paid housing on or off premises—on business premises 100% deductible for C-Corp farm business, not taxable to employee recipient,
• Miscellaneous Fringe Benefit such as employer-paid club membership or vacation—taxable to employee recipient
• Meals (not just groceries) prepared on the business premises – 100% deductible for C-Corp farm business, not taxable to employee recipient

Note: Tickets to a baseball game, holiday gifts or money for occasional meals or transportation expense for working overtime–typically for amounts under $75 in value–are considered de minimis fringe benefits and are generally excluded by the IRS.

Are Fringe Benefits Taxable?

Yes, to the recipient, unless the law specifically excludes it (see Exclusions, below) from being reported as wages.
As an employer who provides a fringe benefit, you are responsible for making sure the value of the benefit is included in the recipient’s pay. This means that you must include the amount of the fringe benefit in the employees’ wages and report it on their Form W-2, Wage and Tax Statement. Generally, the amount is subject to Federal income tax withholding, social security, and Medicare.

A Roseville Accountant Can Help Report Your Benefits Correctly

First of all, don’t panic. At Cook CPA Group, we have extensive knowledge of tax rules regarding fringe benefits for farm businesses like yours and are here to help you minimize any tax consequences that you might be subject to.

In general, employers may elect to treat taxable fringe benefits as paid in a pay period, quarterly, semiannual, or annual basis, so if you haven’t been reporting fringe benefits this year, there’s still time. Another thing to keep in mind is that while taxable fringe benefits are typically included in employee wages (and reported) in in the year the benefit is received special rules typically apply to different benefits.

Excluded benefits aren’t subject to federal income tax withholding. Also, in most cases, they aren’t subject to social security, Medicare, federal unemployment (FUTA) tax, or Railroad Retirement Tax Act (RRTA) taxes and aren’t reported on Form W-2 (or 1099-MISC for independent contractors).

Here is a partial listing of excluded fringe benefits:

• Accident and health benefits
• Achievement awards
• De minimis (minimal) benefits
• Educational assistance
• Employer-provided cell phones
• Group-term life insurance coverage
• Health savings accounts (HSAs)
• Lodging on your business premises for employer convenience and agreed to by the employee
• Meals for employer convenience and on business premises
• Transportation (commuting) benefits

Penalties and interest may be assessed by the IRS for late filing as well as under-reporting the value of fringe benefits. When you use a CPA for farmers like Cook CPA Group, you can rest easy knowing your bottom line won’t be impacted by unnecessary penalties and fees.

Documentation is Important for Your Business

As a CPA for farmers, we can’t say enough about the importance of documentation and record keeping for farm businesses like yours. Not keeping proper records—or any records at all—has often resulted in farmers like you not being able to treat fringe benefits as tax-free.

If in doubt keep every receipt. As a CPA for farmers, we understand the tax code rules and are able to determine whether a particular receipt is necessary–or not. Also, employment agreements and, for C-Corporations, board meeting notes specifying how fringe benefits for employees benefit the corporation go a long way toward providing the documentation needed.

Don’t let confusion about fringe benefits keep your farm business from getting ahead.

As with all things tax-related the rules regarding taxation of fringe benefits are complicated. If you have any questions about fringe benefits, we’ve got answers.