The Tax Cuts and Jobs Act (TCJA) has created several changes to the tax treatment of employee benefits. It was not signed into law until December 2017, making it difficult for many employers to have adjusted their benefits offerings for 2018. Even so, they will need to understand how the new law will affect their businesses’ 2018 taxes. They also will need to decide whether they want to make any changes in their benefits packages going forward.
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The TCJA changes with regards to employee benefits vary as to whether they’re favorable or unfavorable and also if they impact the taxes of employers, employees or both. These changes include:
Moving expenses. Moving expenses reimbursed or paid directly by the employer will no longer be excluded from employees’ taxable wages, at least through 2025. (There is an exception for some members of the Armed Forces on active duty.) The reimbursements will remain deductible for employers.
Transportation fringe benefits. TCJA eliminates employer deductions for the cost of providing qualified transportation fringe benefits (such as, parking allowances, transit passes and van pools). These benefits will remain excluded from employees’ taxable wages.
The new law also eliminates deductions for any expense incurred for providing transportation, payment or reimbursement for commuting between an employee’s residence and place of employment (for example, a car service), except as required to secure the employee’s safety. The law also removes, through 2025, the wage exclusion for bicycle-commuting benefits, though these benefits will continue to be deductible for employers.
Employee achievement awards. Awards of tangible personal property given in recognition of length of service or safety achievement — and also presented as part of a meaningful presentation — are both excludable from employees’ taxable wages as well as deductible for the employer (subject to certain limitations). The new law doesn’t change any of the rules for employee achievement awards, instead it clarifies them by providing a definition of “tangible personal property.”
Under the TCJA, tangible personal property does not include cash, cash equivalents, gift cards, gift coupons, gift certificates (other than where the employer has preselected a limited range of items), vacations, meals, lodging, tickets for theater or sporting events, securities and other nontangible personal property.
Paid family and medical leave. The TCJA establishes a new tax credit for employers that provide paid family and medical leave, but there are a couple of major caveats: 1) It’s available only for 2018 and 2019, and 2) it’s generally available only if such benefits aren’t already required by state or local law and aren’t already provided by the employer.
Eligible employers can claim the credit if they have a written policy providing at least two weeks of such leave annually to all qualifying employees, both full- and part-time. (The requisite leave for part-timers is determined on a prorated basis.)
The pay rate must equal at least half of the employee’s normal wages. The amount of the credit is 12.5% of wages paid for up to 12 weeks per tax year. The percentage climbs incrementally as the rate of leave pay exceeds 50% of the regular pay rate, topping out at a 25% credit for full wages.
As you review your benefits offerings, be sure to take into account other matters, more than just the tax implications of the benefits being provided. For example, if you find your local area with a tight job market (low unemployment/high level of competition), you may be better off to maintain certain highly valued benefits, even if they no longer provide your business with the same tax advantages. The overall benefits to recruitment and retention could make up for the higher tax liability. Also to consider, your overall tax liability could still decrease, due to other changes in the tax laws under the TCJA.