October 18, 2021
Guide to tax withholdings, payroll, and expense reporting on wellness and fringe benefits
As People Teams seek cutting-edge ways to achieve higher workforce 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 People 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 benefits recipients.
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 qualified 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.
Categorizing purchases by taxability
Now that we’ve explained the differences across pre-tax, taxable, and non-taxable purchases, let’s cover examples and online resources.
|Example: Commuter benefit
See a list of pre-tax benefits examples →
|Example: Gym membership
See a list of common taxable benefits examples →
|Example: Job-related professional training
See IRS definition of non-taxable business expenses →
See common employee-paid business expenses →
As you can see, from the IRS’ perspective, there’s no such thing as a “wellness benefit.” What we colloquially refer to as wellness really spans multiple tax categories which can create a lot of friction for HR admins. For example, imagine that you create a dynamic wellness program that includes dependent care assistance, gym reimbursements, and a conference stipend. Voila! You suddenly combined pre-tax, taxable, and non-taxable benefits as part of your program. Your employees will probably be quite satisfied but knowing how to navigate the tax implications of these categories will also be crucial to the program’s success and sustainability.
It’s important to understand how your payroll and accounting systems can integrate with any third-party vendors like JOON that you use to administer flexible benefits. HR teams should work with payroll providers and benefits vendors to ensure that each purchase is categorized accordingly and that there is a process for reconciling reimbursements and taxes. JOON customers can generate purchase reports with suggested taxability based on preconfigured rules.
Administering a compliant wellness program for pre-tax benefits
While wellness programs may span the tax spectrum, pre-tax benefits are typically highly regulated and involve compliant-qualified vendors. For example, here are popular vendors for common pre-tax benefits:
Again, the upside of pre-tax benefits is that they are tax advantaged. The typical downside is that because of the extent of regulations, the “fine print” can be quite exhausting. For example, programs may require employees to use a designated debit card for purchases or upload receipts afterward. They may also require employees to predetermine their contributions ahead of actual spending. These requirements tend to lower employee utilization despite the tax benefits.
That’s why many companies are launching wellness programs that include taxable and non-taxable benefits. While they may be less “tax advantageous”, they are also less regulated and therefore can be facilitated with a better user experience for employees. There are however some critical workflows and considerations for HR teams.
Administering a compliant wellness program for taxable and non-taxable benefits
If you’re a forward-thinking employer that wants to invest in more holistic benefits for your workforce that incentivizes physical and mental wellbeing, you’re going to be primarily focusing on taxable and non-taxable benefits. We’ve created the following table with a general process for how to be compliant for each type of benefit.
|Employee makes purchase and gets reimbursed by employer||Employer makes purchase for employee|
|Non-taxable benefit (e.g. professional training)||Give 100% reimbursement to employee via payroll, expense reporting software, or third-party vendor, and then categorize purchase correctly in expense reporting software||Categorize purchase correctly in expense reporting software|
|Taxable benefit (e.g. gym membership)||Option 1: Give employees a 100% reimbursement via third-party vendor. Taxes are then withheld afterward on W-2 (per IRS guidance) via a Payroll process sometimes called “imputed pay.”
Option 2: Add a ‘bonus’ to a payroll cycle and withhold taxes as part of the reimbursement.
|Consult your payroll team for appropriately valuing the benefit and withholding taxes accordingly. Taxes are typically withheld on W-2 (per IRS guidance) via a Payroll process sometimes called “imputed pay.”|
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!