Documenting taxable fringe benefits

A few weeks ago, I talked about the presence of fringe benefits as a red flag to the IRS. When there is a tangible fringe benefit, such as tuition discounts, use of company property (such as an apartment or condo), life insurance or even items like gift cards, you need to properly document the benefit to the recipient. Here’s how:

–         Provide the employee, contract worker or director with a written explanation that they received a fringe benefit which will appear monetized on their payroll check and is taxable as regular income.

–         Include the following on the written description:

  • Employee name
  • Effective date
  • Item or benefit description
  • Taxable fringe benefit amount – (Only the taxable amount is needed, not necessarily the full value. Sometimes employees pay a portion of the total, such as tuition fees or day care.)

If the benefit is ongoing, then documentation is only needed once, unless the item or benefit description or value changes.

At the end of the year, the value of the fringe benefits must be included on the employee’s W-2, or the contractor’s Form 1099.  Employers must also include the value of these fringe benefits on any related payroll tax returns.