Employee Bonuses, Awards and Fringe Benefits: What Employers Need to Know

Many small business owners (SBOs) think they don’t need to have a human resources or payroll department. They think they can handle all of the HR and payroll paperwork themselves. The problem is, not having a payroll department means these employers are taking on a considerable financial risk.

While SBOs have know-how in producing their specific products and services, they often aren’t experts when it comes to managing other areas of their business like payroll. They may not understand or even be aware of all the different rules concerning payroll preparation and taxes. If they make one simple error, it could have major ramifications and end up costing their business thousands of dollars in fines.

When you want to reward employees for a good job, you have to report it according to the rules!At The Payroll Department, Teresa Ray and her staff have seen many situations where employers didn’t handle their payroll processing correctly and ended up being penalized. In fact, here are a few examples of situations concerning employee bonuses, awards and fringe benefits that they’ve frequently seen:

  1. An employer wanted to thank an employee for a job well done. They gave the employee a $100 gift certificate to a fancy restaurant and told them to take their spouse out to dinner. The problem – they didn’t report the gift certificate as income. The IRS considers gift cards to be equivalent to cash. Therefore, they should always be included in an employee’s taxable wages, regardless of the amount.
  2. An employer gave all of his employees a cash bonus at the end of year. However, he neglected to let his payroll provider The problem wasn’t caught until after the employer had closed out his year-end books. Remember: All cash bonuses are taxable and need to be included in the employees’ wages.
  3. An SBO wanted to reimburse her employees for mileage when they used their own car for business purposes. But she was confused if this reimbursement was considered as income to each employee. Reimbursement depends on the type of plan your business has – accountable or non-accountable. With an accountable plan, an employee completes an expense report listing the expenditure (i.e., the number of miles driven each day to or from business locations, the purpose of the visits, etc.). If the reimbursement amount given to the employee exceeds the applicable federal rate for mileage, the excess is included on the employee’s W-2. With non-accountable plans, the company pays the employee a flat monthly reimbursement amount. The entire reimbursement amount is then included on the employee’s W-2.
  4. Another small business owner wanted to provide company cars to his employees, but he wasn’t sure how to differentiate between company and personal use. There are three different valuation methods for calculating the personal use of a company auto, we suggest you talk with an accountant to determine which method your company should use.
  5. An employer wanted to reimbursement his employees who travel to another site to complete a short-term work assignment. However, after several months, he discovered that the short-term assignment was likely going to extend beyond a year, and he wasn’t sure how this affected his employees’ mileage reimbursement. In these cases, when a short-term assignment goes beyond a year, the travel reimbursement is taxable and should be included on the employee’s W-2.

As you can see, the payroll tax rules concerning how to handle employee bonuses, awards and fringe benefits can be extensive when it comes to managing payroll – something the normal SBO doesn’t have the knowledge and expertise to handle. That’s why it makes sense to outsource your small business’s payroll to a company like The Payroll Department. We have the specialized training and knowledge to process your payroll and tax filings for you, so you can concentrate on what YOU do best – running your small business.

For more information on how The Payroll Department can make a difference in managing your payroll and small business taxes, contact Teresa Ray at (317) 852-2568.

-Ariane of The Payroll Department blog team

Posted in: IRS and Tax forms, Payroll, Rules, Regulations and Laws

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