As the year draws to a close, employers must review taxable fringe benefits to ensure proper year-end payroll reporting. The IRS requires that certain benefits provided to employees—such as personal use of company vehicles, expense allowances, and S-Corporation shareholder health insurance—be included in taxable wages.
Failing to report these benefits before December 31 can result in payroll errors, IRS penalties, and costly year-end corrections. Here’s what business owners need to know about IRS fringe benefit rules and what to do before the final payroll of the year.
What Are Taxable Fringe Benefits?
The IRS defines fringe benefits as any form of pay provided to an employee in addition to regular wages. While many benefits (like standard health insurance and retirement contributions) are tax-free, others must be reported as taxable compensation on W-2 forms.
Company Car Use as a Taxable Benefit
- Personal use of a company-owned or leased vehicle is a taxable fringe benefit.
- Personal use includes commuting to the office from the employee’s home.
- Employers must calculate the fair market value of personal mileage and include it in the employee’s taxable wages.
- Mileage logs should be kept to separate business from personal use.
Expense Allowances and IRS Tax Rules
- Flat allowances for travel, meals, or other expenses are taxable unless employees submit receipts under an accountable plan and return excess amounts.
- Without proper documentation, the entire allowance is treated as taxable wages.
Group-Term Life Insurance Over $50,000
- Employer-provided group-term life insurance above $50,000 per employee is considered taxable income.
- The taxable portion must be reported on the employee’s W-2.
Health Insurance for S-Corporation Shareholders
- If an S-Corporation pays health insurance premiums for shareholders owning more than 2%, the cost is treated as taxable compensation.
- These amounts must be reported on fourth-quarter payroll tax filings and included in W-2 wages.
Why Employers Must Act Before December 31
All taxable fringe benefits must be valued and added to payroll before the last payroll of the year. This ensures:
- Proper withholding of FICA and Medicare taxes
- Accurate reporting on Forms 941 and W-2
- Compliance with IRS year-end reporting requirements
Waiting until January is too late, since year-end payroll reports will already be filed.
Employer Action Steps Before Year-End
To remain compliant and avoid costly adjustments, employers should:
- Review policies to identify taxable fringe benefits
- Collect mileage logs, insurance premium records, and allowance substantiations
- Calculate the fair market value or actual cost of benefits
- Adjust the final payroll to reflect taxable amounts
- Coordinate with your CPA or payroll provider before the last payroll run
How Lanigan Ryan Can Help
At Lanigan Ryan, we help businesses navigate IRS rules and year-end reporting requirements. We can:
- Calculate company car personal-use values
- Assist with accountable plan documentation
- Report shareholder health insurance premiums properly
- Prepare accurate W-2s and 1099s for compliance
Need assistance with your year-end payroll reporting? Contact us today to ensure your taxable fringe benefits are properly reported before December 31.
FAQs on Taxable Fringe Benefits
Are all fringe benefits taxable?
No. Some benefits, such as health insurance and retirement contributions, are excluded. However, benefits like personal use of a company car or life insurance over $50,000 are taxable.
How do I report taxable fringe benefits on a W-2?
They must be included in Box 1 (Wages) and may also be subject to Social Security and Medicare taxes.
Do S-Corporation shareholder benefits count as taxable income?
Yes, if the shareholder owns more than 2%, employer-paid health insurance premiums are taxable wages.
Take action now—review your taxable fringe benefits and finalize reporting before December 31 to stay compliant and avoid penalties.
