The Tax Cuts and Jobs Act (TCJA) mandates multiple changes to the tax treatment of employee benefits. It was signed into law too late for you to have made many adjustments to your benefits offerings for 2018, but you need to know how the changes will affect your business’s 2018 taxes — and determine whether you want to make any adjustments to your benefits package going forward.
Get to know the new landscape
The TCJA changes related to employee benefits are varied in terms of whether they’re favorable or unfavorable and whether they impact the taxes of employers, employees or both. Affected areas 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’s an exception related to certain members of the Armed Forces on active duty.) The reimbursements remain deductible for employers, however.
Transportation fringe benefits. The new tax law eliminates employer deductions for the cost of providing qualified transportation fringe benefits (for example, parking allowances, transit passes and van pools), though these benefits are still excluded from employees’ taxable wages.
It also disallows 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 necessary to ensure the employee’s safety. And the TCJA suspends through 2025 the wage exclusion for bicycle-commuting benefits, but they remain deductible for employers.
Employee achievement awards. Awards of tangible personal property given in recognition of length of service or safety achievement — and presented as part of a meaningful presentation — are excludable from employees’ taxable wages and deductible for the employer (subject to certain limitations). The TCJA doesn’t change the rules for employee achievement awards but clarifies them by providing a definition of “tangible personal property.”
Specifically, tangible personal property doesn’t include cash, cash equivalents, gift cards, gift coupons, gift certificates (other than where the employer 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 creates a new tax credit for some employers that provide paid family and medical leave, but there are a couple of catches: 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.
Think big picture
When evaluating your benefits offerings, consider more than just the tax implications. Especially in a tight job market, you might find it worthwhile to continue highly valued benefits that no longer come with the same tax advantages. The benefits to recruitment and retention could make up for the higher tax liability. In addition, your overall tax liability could drop in any case, due to other changes in the TCJA.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.