As an employer that provides its employees a variety of taxable noncash fringe benefits, you may want to consider taking advantage of the flexibility the IRS offers in withholding on and accounting for these benefits.
Your wage payments to employees are generally subject to federal income tax withholding and FICA tax when actually or constructively paid. However, under a special timing rule, for federal income tax withholding and FICA tax purposes, you can elect to treat the value of taxable noncash benefits as paid on a pay period, quarterly, semi-annually, annually, or on another basis, provided that you treat the benefits as paid no less frequently than annually. Generally, you must withhold the applicable federal income tax and FICA tax on the date or dates you elect to treat the benefits as paid. You can treat the value of a single fringe benefit as paid on one or more dates within the same calendar year, even if the employee receives the entire benefit at one time. For example, if your employee receives a noncash fringe benefit valued at $1,000 in one pay period, you can treat the $1,000 fringe benefit as made in four payments of $250, each in a different pay period, rather than as a $1,000 payment in one pay period.
You do not have to make the same election for all your employees. Therefore, you may withhold income and FICA tax more frequently for some employees than for others. Also, you can change the election as frequently as you want, so long as you treat all the benefits provided in a calendar year as paid no later than December 31 of the calendar year. You cannot use this special rule for a fringe benefit that is a transfer of tangible or intangible personal property of a kind normally held for investment or a transfer of real property. You do not have to make a formal election or notify the IRS if you choose to use this special timing rule. You are treated as making the election simply by treating the fringe benefits provided in a calendar year as paid on the date or dates you choose, but no later than December 31 of the calendar year in which you provide the benefits.
Under a related rule, you can treat the value of taxable noncash fringe benefits provided during the last two months of the calendar year (or any shorter period within the last two months) as paid in the next year. Thus, you would treat the value of taxable noncash benefits that you actually provide in the last two months of one year as provided in the following year, together with the value of benefits you provide in the first 10 months of the following year. You cannot use this special accounting period for a fringe benefit that is a transfer of tangible or intangible personal property of a kind normally held for investment or a transfer of real property.
Use of the special accounting period is optional. You can use it for some fringe benefits but not others, and the period does not have to be the same for each fringe benefit. However, if you use the rule for a particular fringe benefit, you must use it for all employees who receive that benefit. If you use the special accounting period, your employee also must use it for the same period that you use it. The employee cannot use the special accounting rule unless you do. You do not have to make a formal election or notify the IRS if you choose to use the special accounting period. You may also, for appropriate reasons, change the period for which you use the rule without notifying the IRS. However, you must report the income and deposit the withheld taxes as required for the changed period.
Please call me at your convenience so that we can examine how you may be able to benefit by using either or both of these special rules.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
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Palm Desert, CA 92260
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(Updated 04072021 DFA 320-275)