Fringe benefits and their taxability is a complex issue many nonprofits do not fully understand. In fact, this area is often overlooked and organizations are often surprised to learn that some of the perks they provide to their employees and board members should be reported as compensation, even if no cash is involved. The consequences for not properly reporting taxable fringe benefits can be detrimental not only to the organization but also to the individual. Additional employment taxes may be due on the benefits. Note that board members who are not otherwise employed by the organization are considered independent contractors, not employees. Many benefits require an employer-employee relationship.
In general, fringe benefits are taxable or at least partially taxable and should be reported to the recipient on Form W-2 in box 5, or Form 1099-MISC in box 7 and by the organization on Form 990, Part VII, column (f) and Form 990 Schedule J, Part II, column D. Some of the most common taxable fringe benefits include:
Deferred compensation under Section 457 plans
Health or social club dues
Tickets to sporting or theatrical events
The use of an employer-provided automobile is taxable to the extent the automobile is used for personal purposes. There are several ways to determine the taxable portion. The lease value rules can be used or, in some cases, the value can be calculated by multiplying the number of personal miles by the mileage rate, which is $0.55 effective January 2012.
Similarly, travel expenses may be partially taxable to an employee or independent contractor. If the organization pays for the travel expenses of a spouse or other family member of the employee or board member and there is no significant business purpose behind their presence on the trip, the spouse or other family member's travel expenses must be reported as compensation to the employee or board member. For example, if the air fare of the spouse is paid by the organization, that would be part of the incremental cost includable in the board member's income.
Section 457 plans offer employees or independent contractors a way to defer compensation until a later period. Provided that the plan is an eligible plan, commonly called a 457(a) plan, the income deferred by an employee is not taxable until the compensation is paid. To be an eligible plan under 457, the plan must be sponsored by a qualifying tax-exempt organization. Also, only employees and individuals who provide services to the organization may be participants. Annual contribution amounts may not exceed $17,000 for 2012 as indexed for inflation and cost of living. While contributions will not be taxable for income tax purposes until they are paid, the liability for FICA and Medicare taxes will be incurred as the benefit vests.
If the plan does not satisfy the requirements of Section 457(a), it is often referred to as a 457(f) plan or nonqualified plan and the deferred amounts generally become taxable as soon as the participant is vested. Vesting may occur during or after the employee's career. To the extent an employee becomes vested while working for the organization, the benefits are currently taxable. If vesting is delayed to a time when the employee is no longer working, both the former employee's contributions and its earnings are taxable to the employee. Exempt organization nonqualifed plans are less attractive than similar plans of for-profit employers due to the accelerated requirements to be taxed on the benefit. Furthermore, failure to meet various technical requirements could result in the acceleration of income recognized and an additional 20% tax on the compensation required to be included in the participant's gross income.
Other common taxable fringe benefits include, but are not limited to, dues paid for an employee to belong to a health or social club and tickets purchased for the benefit of the employee to sporting or other theatrical events.
Some of the more common nontaxable fringe benefits (also called disregarded benefits) include:
Health care insurance and most benefits under a cafeteria plan
Meals and lodging provided for the employer's convenience
De Minimis fringe benefits
Working Condition fringe benefits
Qualified Transportation benefits
In brief, a De Minimis
fringe benefit is any property or service whose value is so small that accounting for it would be unreasonable or administratively impractical. Examples of such benefits include, but are not limited to, occasional meals or parties given for employees and their guests. Likewise, a Working Condition fringe benefit is any property or service provided to an employee to enable him/her to perform his/her job. Examples include business-related magazine subscriptions and the payment of professional dues. A Qualified Transportation benefit includes commuter transportation, transit passes up to $125 per month in 2012, or parking in or near the organization's location up to a value of $240 per month in 2012.
If you have any questions about the taxability of the benefits you provide to your employees, please contact RubinBrown LLP.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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