As we near the end of the year, it's time to calculate the extra cost to employees for the taxable benefits you have provided them. Yes, you need to get those amounts recorded in payroll so the goverment gets its required share.

The most common of these is a life insurance benefit over a certain amount. For example, let's say the limit is $50,000 and you provide for 1 X annual salary in life insurance. If an employee is earning $75,000, that means the premiums you paid for the $25,000 difference over the limit ($75,000 minus the $50,000 limit = $25,000) is taxable income to the employee. That taxable income must be recorded in payroll by year-end. It's usually not a large amount since we're only talking about the premiums paid, not the coverage amount. I'm not sure what the current IRS limit is but your accounting or tax people should be able to tell you.

Another area is relocation. Although this is usually handled at the time of the relocation, don't forget about it if you haven't done so. Companies often don't realize, when offering relocation, that there is often a significant tax consequence either to the employee or to the company. Why? Because over the years IRS has reduced the amount of relocation expenses that can be deducted. The expense of the actual move of household goods and people is deductible, but once your employee arrives everything you provide (like a hotel, temp housing, etc.) is taxable income. Companies are often increasing the relocation cash the employee receives to help cover the tax hit to come.

One of my favorite and hard to explain areas is fringe benefits. The first thing I'll say is never let your accounting people try to explain this to employees! Fringe benefits may include more than I'm going to talk about, but this is how I learned about it. When I worked as an employee, all of my companies had nationwide sales forces with company-provided cars. The employees were to record any personal use of the car and the final dollar value of that use was considered taxable income. We usually just added it to the employee's W-2 and let them deal with it when they paid their incomes taxes.

Your other option, which I do NOT recommend, is to put it into the last paycheck of the year so the taxes are deducted through payroll. The reason I don't recommend this is because I've seen an employee left with as little as $11 in their paycheck and suddenly having to find a way to pay for bills and mortgage right after the holidays. Yes, this happened! A new Controller and new Accounting Manager put their heads together while I was out over the holidays and came up with a really bad plan. I started getting phone calls from sales reps wondering why their paychecks were so small.

The good news was that I was able to get their paychecks replaced. The bad news was the no one in the accounting department was ever again to do anything that related to employees without my permission. Okay, so I enjoyed that aspect! ha! But they deserved it for thinking about the most expedient way to handle the tax problem without giving a single thought to the "human" side of the situation.

While you can't control tax issues, you can deal with them better if you think about the big picture. Just remember to keep the employee's situation in mind and make sure they have advance knowledge of anything that will affect their income. Payroll is a very sensitive area and one way you can completely lose an employee's trust and loyalty if a situation is mishandled.