Tax Reform: Key Changes for Employers on Employee Fringe Benefits Deductions and Credits
For employers, it is important to note compliance changes and new rules in the TCJA when reviewing employee benefits policies for 2018 and beyond. The following guide is an analysis and summary related to changes in the new law and tax rules for employee fringe benefits. Be sure to consult your tax professional for your specific situation.
On December 20th, 2017, Congress has passed the most sweeping tax legislation since the Tax Reform Act of 1986. The House passed the Tax Cuts and Jobs Act (TCJA), which the Senate had passed the previous day. Although the impact of the law on employers if far less than what was proposed in the House, compliance and adherence to the new laws for employers remains a challenge.
The following guide is an analysis and summary related to changes in the new law and tax rules for employee fringe benefits. Be sure to consult your tax professional for your specific situation before planning policy changes.
The new law disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety.
It also eliminates employer deductions for the cost of providing qualified employee transportation fringe benefits (for example, parking allowances, mass transit passes and van pooling), but those benefits are still tax-free to recipient employees. IRS guidance will be necessary for individuals using pre-tax contributions for transportation expenses.
Policy considerations: Employers and businesses will need to decide if they will continue to provide transportation fringe benefits to their employees – given that salary reductions for transportation fringes are no longer deductible.
Previous law allowed a moving expense deduction paid directly by the employer under IRC§217. Reimbursements for moving expenses made to employees or paid directly to third parties on and after January 1, 2018 and through December 31, 2025, are included in wages subject to FIT, FITW, FICA and FUTA.
For employers, except for moving expenses for Armed Forces on active duty under certain conditions, they will need to change their tax configuration settings to reflect the inclusion in wages. The change is also required for state and local income tax and withholding purposes.
Current FMLA (Family and Medical Leave Act of 1993) requires that covered employers provide time off of up to 12 work weeks for any 12-month period for a broad range of family and medical-related reasons. FMLA does not require that employees are compensated – that is solely a business or policy decision of the employer.
Under the new law, eligible employers are allowed to claim a general federal business tax credit of 12.5% of wages paid to qualifying employees during any period in which such employees are on FMLA. There are numerous conditions and circumstances for a “qualified employee” and a “qualified employer,” so check with your tax advisor.
There are two important considerations employers should begin to examine. First, now that a federal tax credit is available, businesses will need to determine if they will modify their paid-leave policies. Second, employers will need to have unique earnings codes that differentiate types of paid leave. Payroll system tax configuration will only be beneficial for computing the tax credit, but also important for determining the correct federal, state and local taxibility.
Previous law provided an federal exclusion from wages for employer-provided length-of-service achievement awards for qualified employees. Effective January 1, 2018, IRC§274(j)(3) is amended to clarify that qualified employee achievement awards do not include cash, cash equivalents, gift cards, gift coupons or gift certificates. They also may not include intangible property such as vacations, meals, lodging, tickets to sporting events, stocks, bonds or other securities.
For employers, you should review your length-of-service and safety achievement policies for intangible property awards. If you have, prior to 2018, been giving employees intangible property and not included them as federal taxable wages, consider protecting yourself from future IRS audit assessments. Your tax advisor can assist you with Form 941-X and Form W-2c. Last, consider communicating your policy throughout your organization quickly so managers and supervisors are aware of the changes and do not inadvertently award intangible awards – which are now subject to taxable wages.
How Will Your Business Plan for Tax Reform Changes?
The TCJA is the largest overhaul of the tax code in more than 30 years, and we’ve covered only the highlights of the employer and business-related tax provisions here. Please contact us if you have questions about how they may affect your business policies or tax planning in 2018.