As an employer, you must have considered providing your employees with some extra benefits besides their regular wages. But have you ever wondered whether these benefits are taxable? What exactly is a taxable benefit, and are they legally required?
If you are a leader or HR professional, you know how important benefits are to the modern workforce. It's no secret that employee benefits are an excellent employee retention strategy.
In fact, 51% of employers said that the use of benefits as a retention tool would become even more important in the next 3 to 5 years.
So, to retain, engage, and motivate your workforce, you must create an agile benefits package that has a mix of taxable and non-taxable benefits.
This blog will cover everything you need to know while considering taxable benefits so that you don't get caught off guard when tax time rolls around.
What Is A Taxable Benefit?
As we know, there are many benefits provided to employees in the form of pay. But some benefits need to be taxed and added to their income.
Taxable benefits are the fringe benefits that your employer pays for and must add to your income to figure out how much of your income is subject to taxation.
The employer may provide employees with benefits in the form of allowances, reimbursements, or free access to property, goods, or services.
But a major question remains. How can you identify which of these are considered taxable benefits? This brings us to the next section on determining a taxable benefit.
Recommended Read: Employee Benefits And Compensation Ideas: A Guide
How To Determine If A Benefit Is Taxable?
Determining whether your benefits are taxable can be complicated.
First, check if the benefit you provide to your employee is a benefit that has monetary value.
Figure out if the employee is the primary beneficiary of the taxable benefit.
If the employee is the primary beneficiary, the benefit is taxable and must be included in their income statement.
According to the Canada Revenue Agency (CRA), an employee is only responsible for paying tax on a benefit if they are the primary beneficiary and there is a measurable economic benefit.
Now that we know how to determine a taxable benefit let's find which benefits are considered taxable and which are not.
Which Benefits Are Considered Taxable?
Here are some of the common examples of taxable benefits.
- Paid vacation
- Health club memberships
- Business-class flights
- Group life insurance premiums provided to employees over $50,000
- Transit passes
The list of taxable benefits varies greatly depending on the organization and location of the business.
To make things clearer, here's a quick rundown on the benefits tax exempted as per IRS guidelines. Anything not on this list will be considered taxable.
- Accident and health benefits.
- Achievement awards.
- Adoption assistance.
- Athletic facilities.
- De minimis (minimal) benefits.
- Dependent care assistance.
- Educational assistance.
- Employee discounts.
- Employee stock options.
- Employer-provided cell phones.
- Group-term life insurance coverage.
- Lodging on your business premises.
- No-additional-cost services.
- Retirement planning services.
- Transportation (commuting) benefits.
- Tuition reduction.
- Working conditions benefits.
How Is An Employee's Benefit Taxed?
Unless the IRS exempts the fringe benefit from taxes, you must report and calculate all the taxable benefits that your company offers.
First off, when offering benefits to your employees, make sure to assess the value of those benefits.
It's important to understand the value of the taxable fringe benefits to report them on the employee's Wage and Tax Statements.
You can either add the value of the fringe benefits to their wages or withhold them at the fringe benefits tax rate of 22%.
Also, you can add the employee's value of the taxable benefits to their total rewards to calculate and withhold the Social Security and Medicare taxes.
Some Common FAQs
1. How do taxable benefits work in Canada?
According to the Canadian Revenue Agency (CRA), taxable benefit refers to a benefit in which an employee receives an economic advantage as money, such as cash or a gift.
2. What are non-taxable benefits?
Non-taxable benefits are those which are exempted from tax and excluded from the gross income. Some examples are retirement benefits, child care, health insurance, employee rewards, disability insurance, etc.
3. Are taxable benefits good or bad?
There is no definite answer to this. Providing benefits to your employees is always great for attracting and retaining top talents—the more non-taxable the benefits, the happier the employees. But, to minimize confusion at tax time, be sure to notify your employees about their taxable benefits ahead of time.
4. How do you calculate taxable benefits?
Most taxable benefits are subject to Canada Pension Plan, Employment Insurance, and income tax deductions. When determining pensionable, insurable, and taxable income, you must take the benefit's fair market value (FMV) or the value difference between its professional and personal use into account.
Further Reading: A Quick And Simple Guide To Compensation Planning
Disclaimer: This article is intended for informational purposes only and cannot be construed as legal advice.