In accordance with the Internal Revenue Code, certain benefits provided to employees outside of the payroll system may be considered taxable to the employee and require reporting on the employee’s Form W-2 when deemed taxable. Examples of this include the receipt of sporting event tickets, awards of merchandise, and prizes. The amount of a taxable fringe benefit reported on the employee’s Form W-2 is the fair market value of the item. A taxable fringe benefit provided on behalf of an employee is taxable to the employee even if the benefit is subsequently given to another person, such as the employee’s spouse, child, or friend.
The taxability of a particular benefit is determined by Tax Services. If a department is considering providing a new benefit to their employees, they should consult with Tax Services prior to providing the benefit so Tax Services can review and determine whether the value would be taxable.
The fringe benefit amount deemed taxable is subject to federal income tax withholding and OASDI (Social Security) and Medicare taxes. The federal withholding tax calculation is determined by adding the fair market value of the item to the employee’s taxable gross using the IRS Percentage Method Tables for Income Tax Withholding.
Departmental personnel are responsible for understanding general rules (outlined below) about providing these types of benefits and reporting them to Payroll Services in order to maintain compliance with tax law. The general rules and additional information about contacting Payroll Services are provided below according to the type of taxable fringe item.
Payslips & Tax Reporting
Once the taxable fringe benefit has been processed by Payroll on an employee’s paycheck, the taxable amount will appear on the employee’s Payslip in the Earnings Section as a Taxable Benefit.
If a taxable fringe benefit is reported after an employee has receive their final paycheck of the calendar year (e.g., December 1 paycheck date for the November pay period), a manual adjustment may be made directly to the employee’s Form W-2 to reflect the amount.
Common Taxable Fringe Benefits
Some of the university’s most common taxable fringe types are explained in the sections below.
In general, the fair market value of tickets to sporting and entertainment events is taxable when provided to employees. This includes tickets to university football games, basketball games, concerts and performing arts events on campus.
Complementary tickets provided to employees may be reported to Payroll Services using the Complimentary Tickets Form, which require the employee’s signature and provides a space to substantiate any official university business use associated with the event tickets. If applicable, the employee should substantiate the use of these tickets for a business purpose with the names of any other persons attending the event, their relationship, and justification. If there is an official business use, the tickets are not taxable; however, all forms should be forwarded to Payroll Services. Departments that provide complimentary tickets regularly and in large quantities can submit a special file to the Payroll Services office.
In addition to the taxability exception for business use, there are other reasons when tickets provided may not be taxable to employees. For instance, if the athletic or entertainment venue desires to promote attendance at a particular event due to low ticket sales and the distribution of the ticket is of no additional cost to the employer, the ticket may be provided as a non-taxable item. The no-additional-cost exclusion is only applicable if the tickets are offered to a wide range of employees and the offering does not discriminate in favor of highly compensated employees.
University departments may also require their staff who work in their department to attend events in order to oversee and act as a representative for the university during the events. This also qualifies under IRS guidelines for the business reason exclusion; however, additional tickets provided to employees for the purpose of giving the tickets to their family or friends (who do not have an official university business purpose) are taxable to the employee. As such, a Complimentary Tickets Form (or other agreed-upon reporting method approved by Payroll and the department) must be submitted to Payroll Services.
Awards and Prizes
Some university departments have established programs that provide for taxable employee awards based on performance, which are processed as a One-Time Payment in Workday and paid directly to the employee as a taxable payroll payment. However, the taxability of awards that are made outside this process must be determined based on the circumstances of the award.
Awards and prizes given to employees (not paid directly to them via the payroll) are taxable unless they meet an IRS provided taxability exception. Under IRS rules, an award of merchandise up to $400 fair market value is not taxable if it is given for length of service or safety achievements, as long as that award is provided as part of a meaningful presentation to the employee. An award of merchandise up to $50 fair market value is also not taxable if it is given to an employee for other reasons (outside of length of service or safety achievements), per the university’s interpretation of the IRS de minimis rules.
Additionally, when awards or prizes are donated by outside parties and university funds are not used to make the purchase, the taxability determination is made based on the amount of control the university has when it’s distributed. If the university has no control over how the donated award or prize is distributed, it is not considered taxable to the employee. Prizes and awards of merchandise that are given to employees outside these circumstances provided above are taxable, regardless of the use of university funds (e.g., purchased vs. donated items).
Taxable awards should be reported to Payroll Services by the awarding department. The method for reporting the awards to Payroll Services will be determined at the time of contact. At a minimum, the department must collect the following information in order to properly report the award or prize:
- Employee’s name
- Employee’s UT EID
- Item description
- Purchase price or fair market value of the item
- Date the item was awarded.
It is important to note that the purchase of gift cards and gift certificates is disallowed for the purpose of providing to employees, regardless of the type of funds (e.g., State vs. Local) used, per Handbook of Business Procedures, Part 9.1.8.
Accrued Leave Donation
Accrued leave hours donated to another university employee via the Sick Leave Donation Program or the Family Leave Pool Donation Program may be taxable to the donor, dependent upon assessment of the leave circumstances by Human Resources Benefits and Leave Management, and whether the recipient’s need meets the medical emergency definition pursuant to IRS guidelines. Donated hours that are taxable to the donor are reported to Payroll Services by Human Resources and the taxable value is determined by multiplying the number of hours deemed taxable by the donor’s hourly rate.
Social Club Dues
An employee’s social club membership dues paid by a department are taxable when the club is used by the employee for personal (non-business) reasons. Each year, membership dues that were paid on behalf of employees and those provided by the club as complimentary to the university are reviewed by Tax Services and a year-end affidavit is sent to those employees in early November requesting that they report the percentage of personal use during the previous 12 months. When returned, the percentage of personal use indicated on the affidavit is multiplied by the annual membership amount to determine the taxable fringe benefit.
Moving and Relocation Expenses
Effective Jan. 1, 2018 due to the passage of the Tax Cuts and Jobs Act, all expenses paid directly to an employee or to a third party to assist with moving personal items and relocation of the employee and family members are considered taxable. Departments may provide this benefit if approved by the dean or vice president, or their designee, in a formal offer letter or other form of written notice to the employee.
The recommended method for providing the benefit is a lump sum payment made directly to the employee. Departmental personnel may process the payment in Workday via Request One-Time Payment for “Relocation” or “Relocation Gross-Up.” The offer letter or other written notice must be attached to the One-Time Payment as support. These One-Time Payments route to Payroll Services for approval in Workday.
If a third party vendor is paid directly to provide moving assistance, the amount is taxable to the employee and the payment voucher is reviewed by Accounts Payable. A Taxable Moving Expense fringe benefit will then be provided to Payroll Services to be added to the employee’s paycheck.
Additional information about moving and relocation expenses is available in the Handbook of Business Procedures, Part 9.1.11.
Last updated 7/22/2021