Preparing W-2s? Don’t Forget Fringe Benefits
September 27, 2022
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 $1,000 of Protection for 1 Month
|Under 25||$ 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.