The importance of taxing employee perks

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ith this changing work environment, companies also rolled out new incentives to attract and retain talent, like brand new employee benefits packages and perk programmes. A study from Joblist revealed 67% of job seekers value benefits more now than they did prior to the pandemic. Of those surveyed, 54% said they would consider taking a lower-paying job if it came with a better benefits package.

As the future of work becomes more employee-centric, HR and finance teams are undertaking more administrative duties to implement tax-compliant incentives. Meanwhile, auditors are looking at another Q2 they will spend uncovering compliance issues with employee bonuses and perks.

It’s up to corporate accountants to help business clients navigate new employee perk tax implications, especially for those supporting a sizeable remote employee population. This challenge is much easier to meet head-on, at the implementation of perk programmes, rather than fixing multiple 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 programmes.

The pandemic threw many employers for a loop when companies had to transition from in-office to remote to hybrid and back again. Prior to March 2020, only 20% of Americans worked from home. By the end of the year, the home-office workforce skyrocketed to 71%. While this number is constantly in flux, the majority of the professional population, 74%, believe remote work will become the new normal.

The last 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 who support their whole well-being.

To meet these demands and remain competitive in the war for talent, companies are re-evaluating their employee perks programmes and compensation practices. By doing so, they’re able to reach a larger talent pool, both in skill level and geographic location.

Examples of programmes many organisations have implemented in the last year:

• Home office reimbursement

• Remote work stipends

• Wellness stipends

• Learning stipends

• Employee bonuses

• Physical gift packages

It’s important to note that employee perks are non-wage offerings that extend beyond salaries and benefits - like health insurance, vision, and dental - which make up 80% of an employee’s compensation stack. Employee perks, also known as fringe benefits, exist in the remaining 20% and can be purchasable, programatic, or environmental.

Accountants are tasked with ensuring clients are in compliance with tax law, and they also provide guidance so employers do not overlook important new regulations or under- or over-tax employees.

It goes without saying that tax compliance is important, but conveying this to clients, particularly in relation to employee perks, is crucial in avoiding issues later on during tax season audits.

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 programmes are a newer concept, it can be tricky to figure out which regulations apply. Failure to comply means potential fines, penalties, loss of tax-favourable status, or possible criminal charges.

IRS compliance in employee perks goes beyond taxing birthday gift cards and occasional cash hand-outs. Most of your business clients today likely support distributed teams (in-office, hybrid, or remote) with a reward programme. For example, they may have implemented a remote work equipment stipend that allows employees to set up their home offices with the computer, desk, and ergonomic chairs they need or want. Other companies have sent 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 offering these perks or covering expenses, employers are exposing themselves to new tax regulations that even the most senior finance leaders may be unaware of. After all, the world of work is rapidly changing – it can be hard to keep up with everything.

A less complicated tax season is music to your and your clients’ ears. You can ease the burden by providing the best guidance to your clients when it comes to taxing employee perks:

• Talk to your clients about their business developments and ask if they’ve introduced any new employee perks or stipend programmes

• Review their method(s) to keep track of activities that have tax implications

• Suggest that they offer compliant perks at implementation so that they don’t break tax laws (ie. offering stipends and keeping track of what’s taxable and non-taxable)

• Recommend they use an HR tool designed for employee perk tax compliance

Ensuring tax compliance on the front end, from the inception of an employee perk programme, helps avoid a tax-season predicament. Combining a compliant workflow with stipend tools to separate taxable and non-taxable employee perk transactions, safely store all employee receipts for non-business expenses, and provide detailed reports and documentation, not only eases the administrative burden for HR and Finance teams (and corporate accountants!) but it also makes tax season much less daunting for everyone, employees included.