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Tax Implications of Employee Benefits in a COVID-19 World

By Laura Willard, CPA, Tax Associate

COVID-19 has unequivocally changed the way businesses operate. This includes how some companies approach fringe benefits. In this time where working from home is common, some businesses are looking for creative ways to support staff who have drastically different needs than they did a year ago. These new benefit arrangements can create tax uncertainties for employers and employees.

Work from Home Equipment Reimbursement and Stipends

One of the most common benefit issues employers are considering is how to assist employees with their physical workspaces while working from home. A few states require reimbursing employees for necessary job expenses. While Texas does not require reimbursements, they can still be a valuable tax-free employee benefit used to support work from home arrangements.

Equipment and furniture purchased for the home office can be fully reimbursed as a tax-free benefit by the employer if these items are exclusively for business use by the employee. Equipment isn’t the only expense that employers can help cover for their work from home employees. The business-related portion of internet and phone costs can also be reimbursed as a tax-free benefit to the employee.

To qualify as tax-free, employers need an accountable plan in place to govern the reimbursements. Accountable plans must include:

  1. Substantiation and record keeping confirming the expenses are business related
  2. Timely submission of expenses
  3. Timely return of excess payments to the employer

Employers can instead pay monthly allowances, stipends, or make more flexible reimbursement arrangements. These payments would be taxable but avoid the more rigorous record keeping for business use, which can be challenging, particularly for utility costs. While less tax favorable, the simplicity of taxable allowances and stipends sometimes practically makes more sense.

Dependent Care Assistance

Dependent care assistance is another area that is receiving increased attention. With daycare closures continuing and many children doing virtual learning from home, many employees are juggling different priorities in new and challenging ways. Employers can provide up to $5,000 of dependent care assistance as a tax-free benefit annually. Any dependent care benefit provided above $5,000 would be includable in taxable wages. Benefits commonly include contributions made to a dependent care flexible spending arrangement (FSA) and can also include amounts paid directly for care, paying fees for online care services, offering negotiated discounts, or the value of on-site or sponsored dependent care.

Another consideration to providing more robust childcare benefits is the availability of a tax credit of up to $150,000 for employer-provided childcare expenditures and resource and referral expenditures. This credit, which is equal to 25% of the qualified childcare expenditures plus 10% of the resource and referral expenditures, and is subject to qualifications and the general business credit limitations, could help mitigate some of the additional costs involved with providing more comprehensive dependent care to employees.

Relocation Costs

Even amid the pandemic, employers are still hiring, and employees are still moving. The Tax Cuts and Jobs Act of 2017 suspended the deduction for moving expenses and similarly made moving expense reimbursements a taxable benefit for years 2018-2025. Even if relocation expenses are reimbursed under an accountable plan, the expenses are still considered taxable wages.

Paid FMLA and Sick Leave under the Families First Coronavirus Response Act

The abovementioned items are optional benefits that employers may choose to provide. Another important piece of the benefits picture for 2020 is the temporary paid FMLA and sick leave requirement and related payroll tax credit that were mandated by the government in the FFCRA. Those rules were covered in this prior article.

In evaluating various policies and benefits, companies should ensure plans do not favor highly compensated employees. For more information, IRS Publication 15-B is a good resource addressing the taxability of various fringe benefits. Benefits are a complex area of taxation. Maxwell Locke & Ritter is always available to help navigate tax implications of employee benefits in this changing COVID-19 environment.

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