How Construction Companies can Properly Account for Fringe Benefits
Let’s start with the basics: according the Internal Revenue Service (IRS), a fringe benefit is “a form of pay for the performance of services.” In layman’s terms, a fringe benefit is an extra benefit that goes beyond an employee's salary, for example, a company car or meals. In the IRS’s eyes, some of these fringe benefits should be considered part of an employee’s income and are thus taxable.
Unfortunately, many employers and their employees are misguided about which fringe benefits are taxable as compensation to the employee, and the rules can be complicated.
For example, auto and fuel reimbursements, which are very common in the construction industry, are generally considered taxable to the employee. But if the employer adopts an “accountable plan”, then many fringe benefits, including auto, fuel and meal allowances, may be tax-free to the employee.
In order to meet the tax-free criteria, the employer must establish an “accountable plan” with the following elements:
- The expense must have been paid or incurred while the employee was performing services for the employer;
- The employee must adequately account to the employer for the expenses;
- If the amount of allowance or reimbursement by the employer exceeds the amount of expenses that are reported to the employer, then the employee must refund the excess amount to the employer;
- If the employer does not establish and properly maintain an accountable plan, then the IRS will deem those reimbursements as taxable to the employee.
Misclassifying and failing to claim fringe benefits properly can be costly. The IRS will re-characterise the fringe benefits as compensation, subject to payroll taxes. The employer will receive a bill from the IRS for the employer’s match of payroll taxes.
The W-2s, W-3’s and 941’s will need to be amended by the employer, and the employee will have to amend his or her individual tax return. The process, especially if an outsourced payroll company like ADP or Paychex is involved, can be time-consuming, cumbersome, and expensive. And while the IRS may waive the penalty, they will not waive the interest.
What about the employers who give 1099’s to their employees who receive fringe benefits?
In many cases, the payment for fringe benefits is paid to the employee as a separate check. As a result, the payroll department is not aware of the payment when they prepare W-2s and 941s and omits the payment from the payroll filings.
In an effort to be compliant, many employers will issue the employees a separate 1099 for the value of the benefit. The IRS will consider the reimbursement to be a “nonaccountable” benefit, and will re-characterise the benefit under the W-2 rules for compensation as discussed above. Providing a 1099 as a means of accounting for the taxable portion of fringe benefits is not permitted under the IRS rules.
While a CPA can help you identify which benefits are taxable, all contractors that receive or dole out any type of “perk” should follow these best practices:
1. Keep detailed records
Employees must keep records of “who, what, when, where, and how much.” For example, for mileage, employees should keep track of where they went, what they did (or the purpose of) the trip, when they went, and how many miles they traveled to and from the destination.
2. Submit expense reports frequently.
Because the accuracy and detail of records is paramount, employees should submit expense reports promptly and frequently. Weekly expense reports, for example, are much more likely to be accurate and complete, while quarterly reports will typically be prepared at the last minute and omit important details.
3. Keep records for at least three years.
If the IRS performs an audit, they may request documentation on fringe benefits for the past three years. In many cases, simply supplying the proper documentation will be the first and final step of the audit. Keep your records for at least three years so you’ll be prepared to comply with any request.
Ensuring that fringe benefits are documented and proper accounting treatment is in place should be a priority for employers and employees in the construction industry, as the IRS is showing no indication of decelerating its strict enforcement of fringe benefit rules.
A tax professional and licensed CPA with experience in the construction industry can answer questions and help you make adjustments for total compliance with the IRS’s standards.
Hollis Davis joined the CST Group in 2014 when her private CPA practice merged with the firm. From her office locations in Virginia Beach, VA and Palm Beach Gardens, FL, Hollis specialises in working with businesses in the construction industry, providing advice on accounting, taxation, and business transition issues.
She also provides consulting services to high-net-worth individuals, assisting with federal and state income tax matters. Prior to founding her own CPA practice in 2001, Hollis was a founding partner at Regan Russell Schickner & Shah, CPAs.
Hollis is a licensed CPA in the Commonwealth of Virginia and in the State of Florida. In 2013, she was recognised as a Super CPA in the Assurance category by the Virginia Society of Certified Public Accountants (VSCPA) and Virginia Business Magazine.
She holds a Bachelor of Science degree in Accounting from George Mason University.
American Institute of Certified Public Accountants (AICPA)
Virginia Society of Certified Public Accountants (VSCPA)
Florida Institute of Certified Public Accountants (FICPA)
Why engineers must always consider human-induced vibration
Human induced vibration, or more accurately vibrations caused by human footfall, often conjures images of Millennium Bridge-style swaying or collapsing buildings.
But in reality, the ‘damage’ caused by human-induced vibrations is less likely to ruin a structure and more likely to cause discomfort in people. Though not as dramatic as a structural failure, any good engineer wants to make sure the people using their structures, be it bridges or buildings or anything in between, can do so safely and comfortably. This is why human-induced vibration must be considered within the design process.
Resonance v Impulse
There are two ways that human-induced vibrations affect structures: resonant, and impulse or transient response. Put simply, resonance occurs when Object A vibrates at the same natural frequency as Object B.
Object B resonates and begins to vibrate too. Think singing to break a wine glass! Although the person singing isn’t touching the glass, the vibrations of their voice are resonating with the glass’s natural frequency, causing this vibration to get stronger and stronger and eventually, break the glass. In the case of a structure, resonance occurs when the pedestrian’s feet land in time with the vibration.
On the other hand, impulse or transient vibration responses can be a problem on structures where its natural frequencies are too high for resonance to occur, such as where the structure is light or stiff. Here the discomfort is caused by the initial “bounce” of the structure caused by the footstep and is a concern on light or stiff structures.
Engineers must, of course, design to reduce the vibration effects caused by either impulse or resonance.
Potential impacts from human induced vibration
Human induced vibration can lead to a number of effects upon the structure and its users. These include:
- Interfering with sensitive equipment Depending on the building’s purpose, what it houses can be affected by the vibrations of people using the building. Universities and laboratories, for example, may have sensitive equipment whose accuracy and performance could be damaged by vibrations. Even in ordinary offices the footfall vibration can wobble computer screens, upsetting the workers.
- Swaying bridges One of the most famous examples of human-induced resonance impacting a structure occurred with the Millennium Bridge. As people walked across the bridge, the footsteps caused the bridge to sway, and everybody had to walk in time with the sway because it was difficult not to. Thankfully, this feedback can only occur with horizontal vibrations so building floors are safe from it, but footbridges need careful checking to prevent it.
- Human discomfort According to research, vibrations in buildings and structures can cause depression and even motion sickness in inhabitants. Tall buildings sway in the wind and footsteps can be felt, even subconsciously by the occupants. It has been argued that modern efficient designs featuring thinner floor slabs and wider spacing in column design mean that these new builds are not as effective at dampening vibrations as older buildings are.
- Jeopardising structural integrity The build-up of constant vibrations on a structure can, eventually, lead to structural integrity being compromised. A worse-case scenario would be the complete collapse of the structure and is the reason some bridges insist that marching troops break step before crossing. Crowds jumping in time to music or in response to a goal in a stadium are also dynamic loads that might damage an under-designed structure.
How to avoid it
As mentioned, modern designs that favour thinner slabs and wider column spacing are particularly susceptible to all forms of vibration, human-induced or otherwise, but short spans can also suffer due to their low mass. Using sophisticated structural engineering software is an effective method for engineers to test for and mitigate footfall and other vibrations at the design stage.