Today, I’m talking about…
Let us talk about fringe benefits. What are fringe benefits? Fringe benefits are supplemental compensations for employees. For example, you might give an employee a company car, health insurance, accident insurance, group life insurance, all those are fringe benefits. In other words, in exchange for their time, you’re paying them these extra benefits in addition to their wages and salaries. Normally, these fringe benefits are done to increase employees’ loyalty to the business. Well, there are some changes that have been made to 2018 when it comes to the fringe benefits you give to your employees.
Let’s talk about qualified bicycle reimbursement. It used to be that in the past, if an employee rode their bike to work, you could choose to reimburse them up to $20 per month for bicycle commuting expenses, and those reimbursements were excludable from wages. Well, under the new law, you have to include that as part of their wage; wage or salary income. And which means it’s taxable by subject to federal tax, FICA taxes. So, in addition to, when it’s subject to FICA tax, we’ll do an example where you see that, in addition to what you actually pay them, you’re also paying them your portion of federal taxes, which increases what you actually have to pay out to them.
Moving expenses. Sometimes you might hire somebody who stays in one city or another state, and you need them to move over to come to you. So, what you do is you reimburse them for their moving. Or it might be you have an employee you need to relocate because you’re trying to open up a new office. So, you could reimburse them before. And this reimbursement was excludable from wages. Well, that’s not the case anymore. When you reimburse your employees you now have to include this as part of wages, which means, in addition to what you pay them, you also have to pay payroll taxes, unfortunately.
So, let’s say at the end of the year, or it doesn’t have to be end of the year, just whenever you have your employee party and then you give out employee achievement awards. Well, it used to be in the past that you could exclude certain things from wages, but now in the new law, it’s been clarified that these items are not to be excluded. So, if you give your employee cash or cash equivalents, gift cards, gift coupons, certain gift certificates, tickets to theaters or sporting events, vacations, meals, lodging, stocks, bonds, securities and other similar items, they’re all taxable as wages. So, you might call them employee achievement awards, but the IRS sees it as you’re paying them for their services.
In the past, meals used to be 100% deductible if it’s for the convenience of the employer. Well now, going forward, the only way you can make it 100% deductible if it’s included in the wages, which you’re better off doing the alternative, which is take the 50% deductible deduction. So, with the 50% deduction, you claim it as meals and entertainment as you normally do, but rather than 100%, it’s now a 50% deduction. So, the 100% deduction for the convenience of the employer, sorry, that just no longer exists anymore.
Well, this is not an employee benefit, obviously, sexual harassment payments, but I only include it here because it’s just becoming more prevalent in our society today. Payments you make to settle sexual harassment cases are not deductible.
So, let’s take a look at an example here. So before, none of these were included in wages. Well, now let’s see what happens. So, let’s say you reimbursed your employee $20 a month for riding their bicycle to work, you reimbursed them $2,500 for moving expenses, and then you gave cash gifts in award of $230. Previously, all you would have paid was $2,750. But now, with that being includable in wages, you have to pay FICA, and a maximum, this is the maximum you’re going to pay, 6% of their wages. This is based on the fact that you might not be paying state wages and you’re paying the maximum federal and you haven’t reached the $7,000 maximum, so this is adjustable, based per employee, but it’s just this, to make it simple, I just make it 6% flat.
So, you go from paying 2,750, to 3,125 and this is a difference of $375.38. So that’s how much more you’d be paying than what you used to, because when you include it in wages, you now have this additional payroll tax you have to pay. Of course, the employees will not like it because, in addition to this, they will also see a tax adoption, which is their part of the portion of tax they have to pay, which before, they’d have just gotten $20 or their $2,500, now they’ll probably get like $18 in this case, because they’ll have deducted the FICA, and then based on their federal and state rates, they’re going to pay $3 in state taxes. So that’ll be $5. So right now, riding they’re getting $20 against $15, they’re losing $5 per 20, up to 50 per 10. So, the employee is not going to like that either, because they’re getting less than what they actually thought they were going to get.
Now, let us take a look at the meals. So, we can see here under the old law, if you spent $45,000 on meals, under the old law you’d have been able to drop this $45,000. Under new law it’s only $22,500. Or if you spent $5,000 under old law, you’d have been able to deduct $5,000, now it’s only $2,500 for meals provided for the convenience of employers. So, this might be more employers might provide less meals. I’m not sure what effect this is going to take, but I’m sure a lot of people are going to be sitting down and re-assessing the fact that they might not be spending a lot on meals, but some people wouldn’t care, because they want to treat their employees right anyway. So, if it still makes sense for them to do it, they will do it. Do not make tax the basis on which you make all decisions. Make the right decisions and then also have tax considerations, but the right decision is the right decision regardless.
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