Create taxable fringe benefits payroll items in QuickBooks Desktop Payroll

Do you need to include fringe benefits for your employees? We'll explain what fringe benefits are and how to set them up.

In this article, you'll learn about:

• What is a fringe benefit?
• Are fringe benefits taxable?
• How to include taxable benefits in pay
• Fringe benefits taxation rules
• Fair market value
• How to set up a taxable fringe benefit payroll item

What is a fringe benefit?

A fringe benefit is a form of pay for the performance of services, given by the employer to the employee. For example, Personal Use of a Company Car (PUCC), in which you allow the employee to use a business vehicle for personal use, is a type of fringe benefit.

Non-cash fringe benefits should ideally be reported on a paycheque where the employee has regular wages to offset the taxes on the fringe benefit items.

Are fringe benefits taxable?

Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it.

Include taxable benefits in pay

The recipient's pay must include the amount by which the value of a fringe benefit is more than the sum of the following amounts:

• Any amount the law excludes from pay
• Any amount the recipient paid for the benefit

Fringe benefits valuation rules

You must use the general valuation rule to determine the value of most fringe benefits. Under this rule, the value of a fringe benefit is its fair market value.

Fair market value

The fair market value of a fringe benefit is the amount an employee would have to pay a third party in an arm's-length transaction to buy or lease the benefit.

This amount is determined on the basis of all the facts and circumstances. The fair market value of the benefit isn't based on the amount the employee considers to be the value of the fringe benefit, nor the cost you incur to provide the benefit.

Set up a taxable fringe benefit payroll item

Creating a taxable fringe benefit payroll item is a multi-step process.

Create an expense account for the fringe benefit

1. From Lists, select Chart of Accounts.
2. Select Account then select New.
3. Select Expense, and select Continue.
4. Enter an Account Name (for example, Employee Health Plan).

Create a sub-expense account for the fringe benefit addition

1. From Lists, select Chart of Accounts.
2. Select Account then select New.
3. Select Expense, and select Continue.
4. Enter an Account Name (for example, Employee Health Plan - Benefit Addition).
5. Specify that this account is a Sub-account of the main fringe benefit expense account you just created.

Create a sub-expense account for the fringe benefit deduction

1. From Lists, select Chart of Accounts.
2. Select Account then select New.
3. Select Expense, and select Continue.
4. Enter an Account Name (for example, Employee Health Plan - Benefit Deduction).
5. Specify that this account is a Sub-account of the main fringe benefit expense account you just created.

Create the fringe benefit payroll item

1. From Lists, select Chart of Accounts.
2. In the Payroll Item List, select Payroll Item then select New.
3. Select Company Contribution, enter a name for the company contribution, and select Next.
4. (Optional) Select the name of the Agency to which the liability is paid from the drop-down list, and select the number that identifies you to that agency.
5. From the Liability account ▼ dropdown, select the fringe benefit Addition expense sub-account you just created.
6. From the Expense account ▼ dropdown, select the fringe benefit Deduction expense sub-account you just created.
7. Select Next.
8. Enter information in the Record of Employment (ROE) Tracking screen, select Next.
9. From the Tax Tracking Type ▼ dropdown list, select the appropriate option based on the type of Fringe benefit and the CRA's T4130 Employers' Guide  - Taxable Benefits and Allowances.
10. On the Taxes screen, select the appropriate taxes based on the type of Fringe benefit and the CRA's T4130 Employers' Guide  - Taxable Benefits and Allowances.
11. Select Next twice (to bypass the Calculate based on quantity window).
12. In the Limit Type window, enter a default rate in the first section if the benefit will be a set amount, and enter the amount of any limit on the item in the second section.
13. Select Finish.

Set up a taxable fringe benefit payroll item

1. From Lists, select Payroll Item List.
2. Select Payroll Item then select New.
3. Select Custom Setup.
4. Select either Company Contribution or Addition, and select Next.
   • Company Contribution: Adds the value of the fringe to be taxed but doesn't increase net pay.
   • Addition: Adds the value of the fringe to be taxed and increases net pay.
5. Enter a name for this item and select Next.
6. Select an Expense account and Liability account from the drop-down lists and select Next.
7. From the Tax Tracking Type drop-down list, select Fringe Benefits and select Next.
8. Select Next twice (to bypass the Calculate based on quantity window).
9. Enter that default rate in the first section of the Default rate and limit window if the benefit will be a specific amount.
10. Enter the amount of any limits on the item in the second section of the window.
11. Select Finish.

Select the scenario that fits how the fringe benefit will be paid to the employee

• If the amount will be included on a paycheque with regular wages to offset the taxes, enter the amount, using the Fringe Benefit payroll item, under Other Payroll Items.
  No other deductions need to be added as the amount isn't added to the net cheque, and only taxes are calculated.
• If the employee won't receive any further wages for the year, and the employer will loan the tax amount to the employee, select Addition, select None for Tax Tracking, and the payroll item (for example, called Advance for payroll tax) on the paycheque for the tax amount.
  This amount must be paid back to the employer by the employee in the time frame outlined in Publication 15 (Circular E).
• If the employee won't be receiving any further wages for the year, and the employer will be the one paying for the taxes, select Addition, and a Tax Tracking type of Compensation, and the payroll item to gross up the check.