The fringe benefits granted to employees are taxable income for them unless the tax law excludes the fringe benefits from taxation. Taxable fringe benefits should be included as income on the employee's W-2. Also, the taxable fringe benefits are subject to withholding.
What Are The Fringe Benefits?
A fringe benefit is a form of wage apart from money for the performance of services by an employee. It is something the employers offer their employees in addition to their annual salary or other wages. If the fringe benefits are transferred in the form of cash, such as a reimbursement or bonus for travel or other expenses, they will be subject to income tax.
18 Common Types of Tax-Free Fringe Benefits
There is a long list of tax-free fringe benefits that do not need to be included in the employee's compensation. What are some examples of tax-free fringe benefits? Examples include:
- Accident insurance
- Achievement awards
- Disability insurance
- Employee stock options
- Educational assistance
- Health Savings Accounts
- Dependent care assistance
- Lodging on the business premises
- Supplemental unemployment benefits
- Health insurance (up to particular dollar amounts)
- Employee discounts on the services or goods that the employer sells
- Group term life insurance coverage, its limits apply depending on the policy value
- Parking expense assistance (tax-free for employees, but not deductible by employers from 2018 to 2025)
- Commuting benefits (tax-free for employees, but not deductible by employers from 2018 to 2025)
- Qualified employee benefits plans, which include stock bonus plans, profit-sharing plans, and money purchase plans
- Working condition fringe benefits, which are services and property provided to employees so they can do their jobs
- Cafeteria plans that allow employees to choose between two or more fringe benefits, which consist of cash and qualified benefits
- De minimis fringe benefits (low-cost benefits) like traditional rewards (such as a retirement gift), low-value birthday or holiday gifts, particular occasion gifts, event tickets, as well as coffee and soft drinks
Employer's Tax Guide to Fringe Benefits
For a detailed description of all the rules that apply to the fringe benefits, see IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits. It has information for employers on the employment tax treatment of fringe benefits.
If the recipient of a type of taxable fringe benefit is your employee, the fringe benefit is subject to employment taxes generally and should be recorded on Form W-2, Wage and Tax Statement. If the recipient of a taxable fringe benefit is not your employee, the fringe benefit is not subject to employment taxes. But, you might need to report the fringe benefit on the information returns like:
|If the recipient receives the fringe benefit as:||Use|
|A partner||Schedule K-1 (Form 1065), Deductions, Credits, Partner's Share of Income, etc.|
|An independent contractor||Form 1099-NEC, Non-employee Compensation|
Any type of fringe benefit given to an employee that does not comply with the rules applicable to the fringe benefits is taxable income for the employee. For example, if an employee who is required to be away from home overnight for rest is given meals, the meals are considered a tax-free fringe benefit. However, non-overnight meals are taxable fringe benefits as the meals do not comply with this rule.
What Are Examples of Taxable Fringe Benefits?
Here are eight common examples of taxable types of fringe benefits:
- Awards: Cash awards are taxable fringe benefits unless they are given to charity. Non-cash awards are taxable fringe benefits unless they are given to charity or nominal in value.
- Clothing: If clothing suitable for streetwear is given to employees, it is considered a taxable fringe benefit.
- Moving Expenses: In the past, if employees moved more than 50 miles for their current job (not a new one), they could get tax-free reimbursement from their employer for their moving expenses. The Tax Cuts and Jobs Act made moving expenses a taxable fringe benefit from 2018 to 2025. Reimbursement of expenses for employees who moved less than 50 miles for their job has always been taxable.
- Bicycle Commuting: Until 2018, employers provided employees who came to work by bicycle up to $20 monthly. The Tax Cuts and Jobs Act made bicycle commuting taxable for employees from 2018 to 2025.
- Excessive Mileage Reimbursements: Payments given to the employees for business-related driving in their vehicle that exceed the IRS standard mileage rate are taxable income for the employees.
- Extreme Education Reimbursements: If the payments given for educational assistance are not job-related or exceed the allowable IRS exclusion, they are considered taxable fringe benefits.
- Expense Reimbursements Without Adequate Accounting: An employee has to provide an adequate accounting for the expense reimbursement, or else it would be taxable income for the employee.
- Working Condition Fringe Benefits: The working condition fringe benefits are tax-free for employees to the extent the employees can deduct the cost of the services or property as a business or depreciation expense if they paid for it.
The working condition fringe benefit is tax-free if an employee uses it 100% for work. The value of its personal use must be included in the employee's compensation, and the employee must pay tax on it. The employees should meet all documentation requirements that apply to the deduction.
Working Condition Types of Fringe Benefits
Picture William, the owner of an architecture firm, who rents a computer. William loans the computer to his employee James so that he can do design work at home. If James uses the computer 100% for work, it will be a tax-free fringe benefit. However, if James uses it 50% of the time for his work and 50% of the time for personal use, he will have to pay income tax on 50% of the computer's value.
The value of any personal use is determined based on the fair market value of the benefit. For example, it cost William $200 monthly to rent the computer he handed off to James. If James uses the computer 50% of the time for his work and 50% of the time for non-deductible personal purposes, he will have to add $100 monthly to his taxable compensation.
An example of a working condition type of fringe benefit is a company car. If an employee drives a company car for personal use, its value for personal use must be included in the employee's income. The employer determines how to value the use of a company car as numerous methods can be used to determine it. The employer often reports a percentage of the annual lease value of the vehicle according to IRS tables.