Compensation - The Final Step is a Two Step
1) Determine the required withholding on all forms of compensation and
2) Determine the proper reporting of all compensation and benefits.
I am finally completing this series. I am to the step that most people are accustom to working with in order to do payroll. While most organizations do complete this step in regards to cash compensation, few seem to complete it correctly in regards to noncash compensation.
Some items of noncash compensation are not subject to withholding while others are. IRS Publications 15, 15A & 15B all deal with properly reporting compensation and fringe benefits. Since we now know what items the organization is providing to its employees, it should be fairly easy to determine any withholding requirements. (Remember that ministers are not subject to any mandatory withholding of federal income tax, so adding their benefits to payroll is fairly simple. Also, ministers are not subject to FICA/Medicare, so this also simplifies this process for their compensation.)
If an organization is using a payroll service, then it is best to remember that its payroll reports are generally prepared very quickly at the end of the quarter or the end of the year. Therefore, it is necessary to communicate with the service prior to the end of any reporting period. Otherwise an organization may find that it is necessary to amend payroll reports that have already been submitted to the IRS and the Social Security Administration in order to properly report some items of compensation.
Several items require special reporting on the Form W-2, so be specific about the benefits that are provided and review the instructions for preparing the Form W-2 each year. For example, dependent care benefits are reported in a separate box on the Form W-2 even though the benefit is not taxable to the employee if provided through a qualifying plan.
In summary, the number one area that can result in an IRS inquiry and/or in the assessment of monetary penalties is payroll reporting. Therefore, each organization should review all payroll filings carefully to determine if the proper amount of tax has been paid and if all items of compensation have been properly reported.