Avoid the Audit: The Importance of Taxing Employee Perks
In offering certain perks or covering expenses, employers must follow new tax regulations that finance leaders may not know about.
The emergence since 2020 of more widespread hybrid and remote work has complicated tax filings for many companies. What’s new about the 2021 tax year, though, is the emergence of remote work as a long-term setup for businesses. This was likely the first full year in which many companies began hiring, supporting, and compensating a primarily remote workforce.
With this changing work environment, companies also rolled out new incentives to attract and retain talent, like brand new employee benefits packages and perquisite programs. A study from Joblist revealed that 67 percent of job seekers value benefits more now than they did prior to the pandemic. Of those surveyed, 54 percent said they would actually consider taking a lower-paying job if it came with a better benefits package.
As the future of work becomes more employee-centric, finance teams are working with HR to complete administrative duties around implementing tax-compliant incentives. Meanwhile, auditors are looking at another Q2 they will spend uncovering compliance issues with employee bonuses and perks.
The challenge of supporting a sizeable remote employee population is much easier to meet head-on, at the implementation of perk programs, than through one-off fixes, after the fact, to myriad instances of incorrectly taxed—or untaxed—perks like cash bonuses and gift cards sent to employees.
Going forward, it’s important to understand the role employee perks play in the current talent landscape as well as how to remain compliant when implementing such programs.
Employee Perks in the Current Talent Landscape
The pandemic threw many employers for a loop when companies had to transition from in-office to remote to hybrid work, and back again. Prior to March 2020, only 20 percent of Americans worked from home. By the end of the year, the home-office workforce had skyrocketed to 71 percent. While this number is constantly in flux, the majority of the professional population—74 percent—believe remote work will become the new normal.
The past two years have also had a lasting impact on workplace productivity (some companies have found great success in remaining fully remote) and recruiting strategies. People don’t just want to work remotely; they also want to work for employers that support their whole well-being.
To meet these demands and remain competitive in the war for talent, companies are re-evaluating their employee perks programs and compensation practices. Doing so enables them to reach a larger talent pool, both in skill level and geographic location. Examples of programs many organizations have implemented in the past year include:
- Home office reimbursement
- Remote work stipends
- Wellness stipends
- Learning stipends
- Employee bonuses
- Physical gift packages
It’s important to note that employee perks are nonwage offerings that extend beyond salaries and benefits—like health insurance, vision, and dental—which make up 80 percent of an employee’s compensation stack. Perks, also known as fringe benefits, exist in the remaining 20 percent and can be purchasable, programmatic, or environmental.
The Role of Compliance in Employee Perks
Many companies are familiar with employee benefits compliance laws like ERISA, COBRA, and HIPAA. They take the necessary steps to tax these plans accordingly. But because employee perks programs are a newer concept, it can be tricky to figure out which regulations apply. Failure to comply may mean fines, penalties, loss of tax-favorable status, or possible criminal charges.
IRS compliance in employee perks goes beyond taxing birthday gift cards and occasional cash handouts. Most businesses today support distributed teams (in-office, hybrid, or remote) with some kind of reward program. For example, they may have implemented a remote work equipment stipend that helps employees to set up home offices with the computer, desk, and ergonomic chairs they need or want. Other companies may send gifts to employees’ homes for employee appreciation week; as part of their onboarding packages; or to celebrate important personal milestones like marriage, a new baby, birthdays, etc.
In providing these gifts or covering expenses, employers are exposing themselves to new tax regulations that finance professionals may be unaware of. After all, the world of work is rapidly changing—it can be hard to keep up with everything. A few key steps are important in making sure perk programs are compliant:
- Talk to your accountants and auditors about any new employee perks or stipend programs you’ve recently introduced (or are planning to introduce soon).
- Standardize your process for keeping track of perk-related activities that may have tax implications.
- Stipulate that new perk programs must be evaluated for compliance prior to implementation, so that they don’t inadvertently break tax laws (e.g., offering stipends and keeping track of what’s taxable and non-taxable).
From: BenefitsPRO