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    How to create taxable fringe benefits payroll items

    Article ID: 1000704

    Overview

    A fringe benefit is a form of pay for the performance of services given by the provider of the benefit to the recipient of the benefit. For example, Personal Use of a Company Car (PUCC), in which you allow the employee to use a business vehicle for personal use, is a type of fringe benefit. Non-Cash Fringe Benefits should ideally be reported on a paycheck where the employee has regular wages to offset the taxes on the fringe benefit item(s). If the employee will not receive any more wages for the calendar year, the employer may either pay all of the taxes for the employee (which requires grossing-up the check) or advance the funds to the employee to cover the taxes on the fringe benefit items.

    Are Fringe Benefits Taxable?

    Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it.

    Including Taxable Benefits in Pay

    You must include in a recipient's pay the amount by which the value of a fringe benefit is more than the sum of the following amounts:
    • Any amount the law excludes from pay
    • Any amount the recipient paid for the benefit

    Fringe Benefits Valuation Rules

    You must use the general valuation rule to determine the value of most fringe benefits. Under this rule, the value of a fringe benefit is its fair market value.

    Fair Market Value

    The fair market value of a fringe benefit is the amount an employee would have to pay a third party in an arm's-length transaction to buy or lease the benefit. Determine this amount on the basis of all the facts and circumstances. Neither the amount the employee considers to be the value of the fringe benefit nor the cost you incur to provide the benefit determines its fair market value.
      IRS on Fringe Benefits: Manufacturing Tax Tips
  • For more information on Fringe Benefits,see Publication 15-B
  • Expected Outcome

    You can create payroll items to pay employee fringe benefits.

    Assumptions

    You have an active, up-to-date version of QuickBooks.

    Details

    To set up a taxable fringe benefit payroll item:

    From the QuickBooks menus at the top, click Lists > Payroll Item List.

    At the lower left of the Payroll Item List, click the Payroll Item button > New.

    Select Custom Setup.

    Select Company Contribution or Addition, click Next. (A Company Contribution item will add the value of the fringe to be taxed but not increase the paycheck net pay, an Addition item will add the value of the fringe to be taxed and will increase net pay.)

    Type in a name for this item, e.g., "Auto Compensation-Personal Use," click Next.

    Select an expense and liability accounts from the drop-down lists, click Next.

    From Tax Tracking Type dropdown list, select Fringe Benefits and click Next.

    Click Next twice (this will bypass the Calculate based on quantity window).

    If the amount will be a set amount, enter that default rate in the first section of the Default rate and limit window.

    If there is a limit on the item, enter that amount in the second section of the Default rate and limit window, click Finish.

    Once you have created the payroll item, choose the senario that fits how the Fringe Benefit will be paid to the employee:

    If reporting the amount on a paycheck where the employee has regular wages to offset the taxes:

    Enter the amount using the Fringe Benefit payroll item under Other Payroll Items. No other deductions need to occur as the amount is not added to the net check, only taxes are calculated.

    If the employee will not be receiving any further wages for the year, and the employer will be loaning the tax amount to the employee:

    Use an Addition, Tax tracking of None, payroll item (you can name it Advance for payroll tax) on the paycheck for the tax amount.  Remember, this amount must be paid back to the employer by the employee in the timeframe outlined in Publication 15 (Circular E).

    If the employee will not be receiving any further wages for the year, and the employer will be the one paying for the taxes:

    Use an Addition, Tax tracking type of Compensation, payroll item to gross up the check.
    You are responsible for determining the value of all non-cash fringe benefits. For more information, see Section 3 of IRS Publication 15-B.

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