Guide to tax withholdings, payroll, and expense reporting on wellness and fringe benefits
Original article by Jonathan Shooshani, JOON Cofounder
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Below is a recent article “Guide to tax withholdings, payroll, and expense reporting on wellness and fringe benefits” by JOON Cofounder, Jonathan Shooshani. It’s a must-read. Plus, a huge thank you for the shoutout!
As People Teams seek cutting-edge ways to achieve higher employee retention and satisfaction, wellness benefits have become an increasingly popular initiative. But like any HR program, there’s always a risk of contributing more manual work, room for error, and tax implications. The term wellness benefit itself is vague, and can include, but may not be limited to, what the IRS calls “fringe benefits.” It’s important for HR teams to understand the nuances down to the individual purchase and payroll ramifications to ensure compliance.
The most highly rated employers in the world use JOON’s platform to seamlessly deliver flexible wellness benefits to distributed teams. These benefits span categories like Family Care, Healthy Food Delivery, Work From Home, and Learning & Development, and include thousands of individual merchants like Peloton, Calm, WeeCare, and Udemy. While we’re not tax experts, we’ve seen first-hand how companies are reconciling federal taxes while setting clear expectations with employees.
The key resources for this article are IRS Publication 15-B (Employer’s Tax Guide to Fringe Benefits) and IRS Publication 5137 (Fringe Benefit Guide). This material has been prepared in partnership with Acru for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. In particular, there may be individual state tax implications not considered in this article.
The differences between pre-tax, taxable, and non-taxable
Before we get into categorizing examples purchases or reconciliation for various payroll providers, let’s take a step back and review the three categories of expenditures that exist in the first place:
Pre-tax (aka ‘exempt’): The IRS incentivizes companies to make programs available that facilitate well-defined (and often capped) expenditures and contributions that an employee can make. These initiatives are considered “tax advantaged” and include programs like commuter benefits, health spending accounts and flexible spending accounts, and 401(k)s.
Pre-tax programs typically come with strict rules and require qualified vendors for administration, but allow employees to invest pre-tax dollars into important quality of life areas from health to retirement. Note that while JOON does not offer pre-tax benefits, most of our customers do, so we will continue to share what we’ve learned from them.Non-taxable (aka ‘business expenses’): Similar to pre-tax, there are expenditures a business can make without paying federal or state taxes. The key difference is that, unlike pre-tax investments, no qualified vendor is required to facilitate the purchase. For example, a business can spend on certain meals and training for employees and such expenditures will not be taxed. If an employee makes a qualifying purchase, they are essentially doing so on behalf of the company, and the company can then reimburse them 100% without any income tax implications.
Tax legislation and IRS guidance on both federal and state levels change frequently with regard to non-taxable business expenses, so it’s best to consult your tax specialist to maintain clear protocols.Taxable (aka ‘income’): Any purchase that isn’t part of a formal pre-tax program or designated as a legitimate non-taxable expense is by definition taxable. This includes some health-related purchases that companies or employees may assume are (or should be) tax exempt, but aren’t. For example, a gym membership or breathwork class are taxable purchases. If a company offers a reimbursement, that reimbursement should have taxes withheld.
It can be difficult to ensure that taxes are withheld accurately, especially if reimbursements are made outside of payroll or accounting systems via third-party vendors or gift cards. Your payroll provider will provide guidance on withholding type (e.g. as a fringe benefit or bonus) and frequency.
Employers working with JOON can offer flexible benefits across taxable and non-taxable categories like Health & Wellness, Learning & Development, Family Care, and Work From Home. JOON makes it easy to offer modern benefits and reimbursements for exciting brands from Peloton to Udemy.
Depending on your payroll and expense reporting software, JOON will either seamlessly sync to reconcile taxes and expenses or generate a purchase report that you can easily import. Again, you should consult your own tax, legal, and accounting advisors before engaging in any transaction. If you are seeking a new accounting advisor, we highly recommend the team at Acru!
