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Preparing W-2s? Don’t Forget Fringe Benefits

By Sarah Rugger

As the weather takes on a wintry feel here in Minnesota, we’re forced to accept what we’ve been denying for weeks: the end of the year is near. For employers, this means it’s time to think about several tax-related to-dos, including W-2s.

If the preparation of W-2s is on your task list, here’s a tip: don’t forget to include fringe benefits! Leaving these off your employees’ W-2s could not only lead to personal tax return amendments but could also put you and your employees at risk for tax penalties.

To help you properly prepare your W-2s, here are five of the most commonly forgotten fringe benefits:

1. Personal Use of Auto

If you or one of your employees use a company car for personal use and do not compensate the company for it, the personal miles are considered income and should be taxable to you or your employee. There’s a formula to calculate what should be reported at year-end, but it can be rather complicated. (Your tax advisor can help!)

2. S-Corp Insurance

This only applies if you’re an S Corp owner who holds more than 2 percent ownership stake. If the company is paying any or all of your health insurance, including health, vision, dental, and disability, this amount should be added to your W-2 at year-end. The rule also prevents you from taking pre-tax deductions for the cost of health insurance. You can write off the amount on the business return, but it must flow onto your W-2. Note: The rule applies to your spouse and children, too.

3. Group Term Life Insurance

If you pay more term life insurance than $50,000 to any employee, the amount in excess of $50,000 is taxed according to the individual’s age. For instance, if you pay $250,000 to a 30-year-old employee, and the employee pays $100 per year to the cost of the insurance, the IRS would deem $200,000 of the amount taxable. The applicable calculation would be .08 x 200 x12 = $192. The $192 is then reduced by the $100 that the employee paid for the cost of insurance. The total that is recorded on the employee’s W-2 is $192 – $100 = $92, which is added to boxes 1, 3, and 5, and also in box 12 with code “C.”

Cost Per $1,000 of Protection for 1 Month

Age Cost
Under 25 $ 0.05
25 through 29 0.06
30 through 34 0.08
35 through 39 0.09
40 through 44 0.10
45 through 49 0.15
50 through 54 0.23
55 through 59 0.43
60 through 64 0.66
65 through 69 1.27
70 and older 2.06

4. Achievement Awards and Gifts

Have you given your employees cash, cash equivalents, gift cards, gift coupons, or tickets to a sporting event? If so, this is considered taxable income and should be added to their W-2s. And yes, this applies even to small dollar amounts. If you can put a value on it, it’s taxable.

5. Employer HSA

If your company contributes to an employee’s HSA account, this amount is non-taxable; however, it should be added to the employee share in box 12 of the W-2. Keep in mind there are annual limits on the amount a company can contribute. For 2022, those amounts are $3,650 for employees with self-only coverage, and $7,300 for family coverage. In addition to these limits, if you are over the age of 55 you can contribute an additional $1,000.

Looking forward into 2023, limits will be $3,850 for employees with self-only coverage, and $7,750 for family coverage with the same $1,000 additional contribution for employees over the age of 55.

Don’t put off W-2 preparation.

It’s important to make sure your employees’ wages and taxes withheld are properly recorded on their W-2s, along with any fringe benefits they’ve received. Waiting until the last minute to record information and complete the forms is never a good idea. Getting organized now can help you avoid an end-of-the-year rush and potentially costly mishaps. And doesn’t the thought of a less stressful December warm your soul?

If you have questions about fringe benefits or preparing W-2s, please contact us today.


 

Meet the Expert

Sarah Rugger, Manager

Sarah’s extensive experience in payroll processing, benefits and accounting software, and compliance procedures allow her to partner with clients on all their payroll needs.

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