Employee Compensation, Benefits & Payroll Taxes (2025)

Payroll Taxes

FICA (Federal Insurance Contributions Act)

Total: Employee 7.65% + Employer 7.65% = 15.3% combined (up to wage base, then 2.9% Medicare only). Self-employed: 15.3% (deduct half on Schedule 1).

FUTA (Federal Unemployment Tax)

• 6.0% on first $7,000 wages per employee ($420 gross FUTA per employee max before the state unemployment tax credit)
• Credit of up to 5.4% for state unemployment taxes paid → effective rate: 0.6%
• Credit reduction states: if state borrowed from federal unemployment fund and hasn't repaid → reduced credit
• Employer-only tax (not withheld from employee)

Form 940 — FUTA Return

Annual. Due January 31. If timely deposits made: February 10.

Form 941 — Employer's Quarterly Federal Tax Return

Quarterly reporting of wages, withholding. Due: April 30, July 31, October 31, January 31.

Form 944 — Annual Return

Small employers (annual liability ≤$1,000) can file annually instead of quarterly.

Worker Classification

Common Law Employee

Employer controls WHAT will be done AND HOW it will be done. Key factors:

• Behavioral control: instructions, training
• Financial control: unreimbursed expenses, investment, profit/loss opportunity
• Relationship: benefits, permanency, written contract

Statutory Employees (W-2, but treated as IC for income tax)

• Agent drivers delivering food/beverages (not milk)
• Full-time life insurance sales agents
• Home workers (piecework for one company)
• Traveling/city salespersons (for one principal)

Report wages on W-2. Social Security/Medicare withheld. BUT: can deduct business expenses on Schedule C (not Schedule A).

Statutory Non-Employees (1099-NEC)

• Qualified real estate agents
• Direct sellers (consumer products in home/other than permanent retail)

Treated as self-employed. Must meet: compensation directly related to sales, contract states not an employee.

Form SS-8

Worker or employer can request IRS determination of worker classification.

Fringe Benefits

De Minimis Fringe

Value so small that accounting for it is impractical → excluded from employee wages. Examples: occasional coffee/donuts, holiday turkeys, occasional personal use of office copier. Cash and cash equivalents (gift cards) are NEVER de minimis (except occasional meals/transportation).

No-Additional-Cost Services

Employer provides services to employees at no additional cost to employer (excess capacity/inventory). Examples: airline flights, hotel rooms. Must be in same line of business, available to all employees on nondiscriminatory basis. Employee's immediate family also qualifies.

Working Condition Fringe

Property/services that would be deductible under §162 if employee paid for them → excluded from wages. Examples: professional memberships, continuing education, protective gear, business use of company vehicle. Employer-provided cell phone with substantial business reason = working condition fringe.

Meals & Lodging

• On-premises meals for employer's convenience: NOT taxable to employee, 50% deductible to employer
• Lodging on premises required as condition of employment: NOT taxable, 100% deductible to employer. Must be on employer's premises, for employer's convenience, and condition of employment. If employee can choose cash instead of lodging → exclusion does NOT apply.

Employee Achievement Awards

• Must be tangible personal property (NOT cash, gift cards, or cash equivalents)
• Non-qualified plan: up to $400 per employee/year
• Qualified plan: up to $1,600 per employee/year (combined qualified + non-qualified limit)
• Employer deduction limited to same amounts

Dependent Care Assistance

Up to $5,000/year tax-free ($2,500 MFS). Employer deduction. Reported in W-2 Box 10.

Educational Assistance (§127)

• Non-job-related education: up to $5,250/year tax-free (written plan, non-discrimination required)
• Job-related education (§132): working condition fringe, no dollar limit
• CARES Act/SECURE 2.0: student loan payments qualify as educational assistance (made permanent by OBBBA)

Adoption Assistance

Up to $17,280 (2025) excluded from taxable wages. Employer deduction. Income limitation applies (same as adoption credit phaseout).

Group-Term Life Insurance

• First $50,000 coverage: employer-paid premium excluded from employee wages
• Coverage >$50,000: excess benefit taxable to employee (based on IRS premium table)
• Dependent coverage: ≤$2,000 = de minimis (excluded). >$2,000 → entire fair market value taxable to employee

Health Savings Accounts (HSAs)

Must have HDHP. 2025 contribution limit $4,300 self-only / $8,550 family. Catch-up $1,000 (55+). Employer contributions excluded from wages. Deductible to employer. Employer contributions must be comparable for all employees with same coverage (else 35% excise tax on employer contributions). Non-qualified withdrawals: income tax + 20% penalty (65+ no penalty for non-medical, but still income tax). Telehealth/remote care coverage before deductible does NOT disqualify HSA eligibility (post-2024).

Flexible Spending Arrangements (FSAs)

FSA contributions not included in wages. Reimbursements for qualified expenses tax-free. Employer can contribute to HCFSA (but counts toward limit).

QSEHRA (Qualified Small Employer Health Reimbursement Arrangement)

• For employers with <50 FTE employees, no group health plan offered
• Employer-funded only (no employee contributions)
• 2025 limits: $6,350 self-only / $12,800 family
• Can reimburse individual health insurance premiums

Qualified Transportation Fringe

• Transit passes/commuter vehicle: $325/month (2025)
• Qualified parking: $325/month (2025)
• Bicycle commuting: NOT a qualified transportation fringe (TCJA eliminated; OBBBA confirms permanent elimination after Dec 31, 2025)
• Employer CANNOT deduct transportation fringe expenses (TCJA eliminated business deduction), but benefit remains tax-free to employee

Cafeteria Plans (§125)

Employees choose between cash (taxable) and qualified benefits (tax-free). Can include: health insurance, group-term life ($50K), dependent care, HSA contributions, adoption assistance. CANNOT include: 401(k) deferrals, educational assistance, transportation benefits, long-term care.

Non-discrimination rules: Plan cannot favor highly compensated employees (HCEs) or key employees. If fails, HCEs/key employees must include benefit value in income.

Simple cafeteria plan: Employers with ≤100 employees can bypass annual non-discrimination testing.

HCE definition: >5% owner OR compensation >$155,000 (2024, used for 2025 testing). Family attribution applies.

Use-or-lose rule: Unused funds forfeited at year-end (except limited carryover: up to $660 for health FSA, 2025).

Accountable vs Non-Accountable Plans

Accountable plan (tax-free reimbursement): Employee incurs business-related expenses, provides adequate accounting (detailed records) within reasonable time (60-day safe harbor), returns excess reimbursements. If not met → treated as non-accountable.

Non-accountable plan: Reimbursements = taxable wages, subject to all employment taxes and withholding, no substantiation required.

Stock Options

Moving Expenses

• NOT deductible for most employees (TCJA suspension through 2025; OBBBA makes permanent)
• Exception: active-duty military
• Employer reimbursements = taxable wages (subject to income + employment taxes)
• Employer can deduct as wages

Affordable Care Act Employer Mandate

Applicable Large Employers (ALE: ≥50 full-time equivalent employees):

• Must offer minimum essential coverage to ≥95% of full-time employees and dependents (children under 26, excludes stepchildren/adopted)
• Coverage must be "affordable" and provide "minimum value" (covers ≥60% of total allowed costs + substantial doctor/hospital coverage)
• Cannot impose enrollment waiting period >90 days
• Full-time = average ≥30 hours/week or ≥130 hours/month

Penalties (2025):

• §4980H(a): No coverage offered to ≥95% of FTEs, and ≥1 employee gets premium tax credit → $241.67/month per FTE ($2,900/year), minus first 30 FTEs
• §4980H(b): Coverage offered but inadequate/unaffordable, and ≥1 employee gets premium tax credit → $362.50/month per affected FTE

Trust Fund Recovery Penalty (TFRP)

100% penalty on responsible persons who willfully fail to collect, account for, and pay over employee withholding taxes. "Willful" = knew or should have known taxes weren't being paid but used funds for other purposes. Assessed against individuals (officers, directors, owners, payroll managers).