Taxation of Fringe Benefits
On the Fringes: The Ins and Outs of Fringe Benefits
Fringe Benefits
In order to attract and retain quality employees, most employers offer some time of additional compensation over the employee’s wage. These work perks are called fringe benefits and they take on many forms.
They can include direct reimbursement to employees for certain expenses they incur or they can be goods or services you provide directly to the employee.
As a business owner, you’ll need to know how to account for these fringe benefits for taxes. While most fringe benefits are not taxable to employees, there are some exceptions.
What are Fringe Benefits?
As an employee, they receive a salary or wage from you. And if you provide other non-salary compensation or perks, these are fringe benefits.
Common examples of fringe benefits are health insurance, education assistance, and retirement plans.
Some fringe benefits are offered universally to all employees, like health insurance while some benefits are only offered to executives, like stock options.
Are Fringe Benefits Taxable?
The general rule is that fringe benefits are not taxable to your employee. However, there are numerous exceptions that we will discuss later.
When a benefit is taxable to your employee, you’ll need to withhold:
- Federal income tax
- State income tax (if applicable)
- FICA (Social Security and Medicare)
And as an employer, you’ll be responsible for paying:
- FICA
- FUTA (Federal Unemployment)
- SUTA (State Unemployment)
- Worker’s Compensation
Taxable Fringe Benefits
As we mentioned, most fringe benefits are not taxable to your employee. However, there are some which are taxable.
Examples of common taxable fringe benefits include:
- Personal use of company vehicle
- Bonuses or incentive pay
- Group term life insurance in excess of $50,000
- Relocation expenses paid to an employee
- Paid time off
- Certain employee reimbursements for allowances
Common Non-Taxable Fringe Benefits
There are numerous fringe benefits that the IRS says are non-taxable. We’ll discuss the most common ones.
Company Car
If you provide an employee with a company car to use solely for company purposes, the cost is not taxable to the employee.
What if the employee uses the car for personal trips? In this case, if the employee uses the vehicle for both business and personal driving, the amount used for personal driving is taxable. In this case, you will need to have the employee maintain a mileage log to document personal versus business miles. You would use the IRS standard mileage rate to calculate the amount to include in your employee’s taxable wages.
Company Phone/Tablet/Computer
Providing your employee with a company phone to use for making business calls is a non-taxable benefit, even if your employee sometimes uses the phone for personal use. This falls under the de minimis rule which states that the value provided is so minimal and the recordkeeping burden would be too high to segregate the personal use.
The phone rules also apply to other electronics like tablets and laptops.
Education and Tuition Assistance
If you provide an educational assistance program to cover the costs of tuition, books, or fees for your employees, you can provide up to $5,250 tax-free. Any assistance above this amount in a year is taxable.
Have your employee provide receipts or other evidence that the assistance you provided was used for educational expenses. This provides you with the evidence you need to not tax your employees on the assistance.
Be aware that there are specific rules for educational assistance programs to qualify for this tax exclusion. For example, the program can’t provide more than 5% of its benefits to shareholders, owners, or their spouses or dependents and employees can’t be given the option to receive cash if they aren’t enrolled in school.
Employee Discounts
Some businesses allow employees to purchase their goods or services at a discount as a perk of the job.
To determine how much of the discount is non-taxable, you’ll need to consider the following:
- If the good or service is offered to customers in the ordinary course of business.
- If the good or service is from a part of the business in which the employee doesn’t provide substantial service.
- How much of a discount is provided.
- Is the discount provided to a highly compensated person.
To be excluded from taxable wages, generally, discounts must be offered on goods or services provided for sale to customers. So, a discount on goods at a company store wouldn’t qualify.
And there are limits on the amount of discount that can be excluded. The maximum amount of discount on services that can be excluded from wages is 20% of the cost you charge customers.
The maximum amount of discount on goods that can be excluded is your gross profit margin on each good.
Child Care Assistance
If you provide child care assistance through a dependent care assistance program so that your employees can work, up to $5,000 of assistance per year is non-taxable.
Health and Life Insurance
One of the most common fringe benefits offered by an employer is health insurance. If you pay for all or a portion of your employee’s health insurance premiums, it is non-taxable to your employee.
There are exceptions for payment of certain long-term care insurance policies and for S-corp shareholders.
The cost of providing up to $50,000 of group term life insurance coverage is non-taxable to the employee. If you provide more than $50,000 in coverage, the additional costs are taxable.
Be aware that there are exceptions for S-corp shareholders, retired employees, and employers with less than 10 employees.
Fitness Centers and Athletic Clubs
For companies that provide on-premise fitness centers that can only be used by employees and their spouses and dependents, the value is non-taxable to employees. The key is that the fitness center or club can’t sell memberships to non-employees or be accessible by non-employees.
The facility can be located in a building that’s not a part of your main office. However, the facility must be managed by you and only employees can have access to it.
Retirement Plan Contributions
Retirement plans, such as 401ks or SIMPLE IRAs, are another fringe benefit provided by employees. Any amount you contribute to the plan for your employee’s benefit is non-taxable to the employee.
If you maintain a qualified retirement plan and offer retirement planning services as a perk, the value of the services is also non-taxable to the employee.
Housing Allowance
If you provide housing to employees, whether or not it is taxable depends on:
- If the housing is provided on your business premise.
- If the housing is provided for your convenience.
- If the housing must be accepted by the employee as a condition of employment.
If the housing meets all three of these criteria, then it is non-taxable to the employee.
However, if the employee has the option to live in the employer-provided housing or receive a cash stipend to live elsewhere, then the value of the provided housing or the cash stipend is taxable to the employee.
For example, as a hospital, you allow your nurses to live in apartments at the hospital or pay them a monthly allowance to find off-premise housing. If the nurse chooses to live at the hospital, the value of the housing is taxable because she had the option to choose to live off-premise.
Commuter Benefits
Often companies will provide some type of compensation for an employee’s commute. It could be paying for a monthly public transit pass or paying for parking costs.
If the transportation benefits you provide are minimal and the recordkeeping burden too high, then the value can be excluded from employee wages under the de minimis rules.
If you pay for a public mass transit pass or provide parking in or near your building, you can exclude up to $270 per month for transit passes and $270 per month for parking for each employee.
If you provide reimbursement to the employee, be sure to have the employee provide evidence that they incurred the expense. This would require you to ask for an expense report and receipt(s).
Relocation Assistance
With the enactment of the Tax Cuts and Jobs Act in the final days of 2017, providing relocation assistance for employees to move in order to work for your company is taxable. Previously relocation assistance was non-taxable and will return to being non-taxable in 2026.
It doesn’t matter if you reimburse your employee for actual moving expenses or provide a relocation allowance. It is all taxable. The only exception is for active duty military members who move due to a military order for a permanent duty station change.
Fringe Benefits Rates Table 2021
None of this information should be taken as legal or financial advice, nor should it deter you from seeking the assistance of a licensed attorney, accountant, or financial services professional. It is meant strictly for educational use. Be sure to consult with your financial professional before implementing any fringe benefits to ensure you’re taxing them correctly.
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