What Employee Compensation Is Taxable?

The calculation of taxable income can be challenging to determine mainly because there is a belief that all types of income are taxable, which is different. A company’s employee payments are subject to taxes, wages and salaries, and overtime. Still, we will see other examples of income in detail so that employees and companies have clear information at the time of declaration.

Employers must withhold federal and state income taxes from wages and benefits taxable for employees. In addition, you must withhold FICA (Social Security and Medicare) taxes on some, but not all, of these benefits.

Gross employee income is taxable, including overtime pay for non-exempt employees and certain lower-income exempt employees.

All tip income is included with all other income in the appropriate boxes on Form W-2. Note that assigned tips (determined by a formula for all tipped employees) should be shown in Box 1 but no other income items.

Employee commissions are included in taxable income. If an employee received advance commissions for services to be performed in the future, those commissions are, in most cases, taxable when received by the employee.

If an employee uses a company car for business purposes, he must separate the employee’s personal use from the commercial use of the vehicle. The employee’s private mileage is taxable as a benefit.

Stock options may be taxable to employees when the option is received, when the option is exercised, or when the stock is disposed of.

Employee bonuses and awards for outstanding work are generally taxable to the employee. This includes trips awarded as rewards for meeting sales goals. Gifts to employees are also taxable; this includes gift cards and items delivered on holidays, but small donations may not be taxable to employees if the skills follow the minimum rules.

Moving expenses are considered an employee benefit, and these payments are taxable to the employee from 2018 to 2025.  Even if your business has a responsible plan to distribute and track these moving costs, they are subject to employment taxes.

You can read more about this topic here: Employer-Paid Moving Expenses: Are They Taxable?

Minimum benefits

These small gifts are given to employees occasionally and have a low value. A small profit that is not taxable. It can be an employee meal, coffee, donuts at a meeting, or a picnic. Otherwise, according to the IRS, gift cards or certificates of less than $25 and cash are taxable to the employee.

Non-taxable benefits and other payments

Working conditions benefits: These goods or services would be allowed as a business or depreciation expense for the employee if they paid for them. Two examples are a company car for commercial use or a subscription to a professional publication. If you give cash to an employee for any of these expenses, the employee must provide you with verification that the money was spent on that item and must return the unused cash.

Cell phones: If you give an employee a cell phone for primarily business use, its value is not taxable to the employee.

Health insurance: If an employer pays the cost of a medical or accident insurance plan for employees, these payments are not wages and are not subject to federal income tax withholding. But the cost of these benefits must be included in the salaries of the corporation’s employees.

Workers’ compensation for occupational illness or injury is not taxable to employees if they are paid as part of the state workers’ compensation program. Other payments to employees, such as a pension, are taxable to the employee.

Educational assistance benefits of less than $5,250 paid to employees in a calendar year are not taxable to the employee if provided as part of a qualified educational assistance program. For more information on educational assistance programs, see IRS Publication 970.