Fair Market Value: Definition and Overview
Fair market value (FMV) refers to the estimated price an employee would reasonably pay for a benefit or service on the open market, without access to discounts, special deals, or subsidies. It’s most often used to assess the worth of non-cash fringe benefits provided by an employer.
Understanding Fair Market Value in Payroll and HR
In payroll and human resources, FMV is particularly important when calculating the taxable value of fringe benefits offered to employees in addition to their base salary. If the benefit is not classified as tax-exempt by the IRS, its fair market value must be included in the employee’s taxable compensation.
This valuation ensures that employees are properly taxed for any non-cash benefits they receive, whether it’s a company car, free housing, or subsidized gym memberships. Accurately determining FMV helps maintain compliance with tax laws and prevents misreporting of employee income.
Reporting Requirements
Once the FMV of a fringe benefit is determined, it should be added to the employee’s Form W-2 as part of their taxable wages. Employers must also report the value on federal forms like Form 940, Form 941, and any required state-level tax forms. These may include unemployment insurance, income tax, or state-specific programs such as SDI (State Disability Insurance), FLI (Family Leave Insurance), or PFML (Paid Family and Medical Leave).
Payroll systems like Beyond can help streamline this process, automatically calculating and recording FMV-based benefits in accordance with current tax laws.