Year-end has a way of bringing small perks back into view, the ones that seemed harmless at the time but now come with tax rules attached. This quick refresher sorts out the difference between taxable and non-taxable fringe benefits and offers a checklist to help you record the taxable ones as you wrap up your payroll year.
Taxable vs. non-taxable fringe benefits
Taxable fringe benefits can feel like everyday favors until tax time says otherwise. They’re the perks that give employees a little extra convenience or comfort but also count as income when the value crosses certain lines. Things like personal use of a company car, small rewards, or paid outings often fall into this bucket.
Non-taxable perks, on the other hand, stay safely out of payroll because the law treats them as work tools or minor courtesies. The trouble comes when these two get mixed, especially at year-end, when those scattered perks finally need a clear label.
Year-end fringe benefit review checklist
- Step 1: Gathering and validating the data. The aim of gathering and validating data is to line up what people actually received with what was recorded along the way.
Begin by looking through mileage logs, basic receipts, and small favors that may not have reached your payroll system. Compare reports across HR, payroll, and finance teams to be sure the same benefit wasn’t tracked in multiple ways. When a particular transaction seems unclear, for example, a vague charge or a perk no one fully remembers, take a moment to confirm the benefit is legitimate.
- Step 2: Calculating the taxable amount. Once the perks are gathered, the next step is to figure out what each one is actually worth for tax purposes. The idea is to place a fair value on the benefit so payroll can treat it like any other piece of compensation. Some items are easy, like a gift card that already shows its value. Others, like personal use of a car or mixed-purpose travel, may take a bit more work to figure out.
One approach is to start with the market value of the item or service and compare it with what the employee actually used. Some perks have special rules that allow a simpler method, which can help keep the math predictable.
Once the value is set, payroll adds it to the employee’s taxable income. This might mean adjusting a final pay run or adding a one-time entry. The key is to make sure the amount is clear, backed by records, and added before the year closes.
- Step 3: Communicating with employees. Employees appreciate knowing which perks will show up as taxable income and why. A brief note or quick conversation early on can spare a lot of guessing later, especially when the benefit was given months ago and memories have faded. Explain what the perk was, how its value was figured out, and when it will appear in their pay record.
Closing out taxable fringe benefits is about tying together the small transactions that happen throughout the year. It also builds a habit of noticing these expenses as they happen so you’re never rushed when finalizing your payroll at the end of the year.