In this blog, we will be discussing common Fringe benefits and explaining which benefits are taxable and which are not. Fringe Benefits are a way to compensate your employees beyond their regular wages. These perks, like gym memberships and cell phone reimbursements, can help your business attract and retain talented employees by sweetening your overall compensation package.
So why would I want to offer fringe benefits?
Fringe benefits can help you hire and retain the employees your business needs. In a recent survey of job hunters, 25 percent of respondents said perks were very important. Only 10 percent said they weren’t important at all. This is why more and more companies offer fringe benefits as part of their overall compensation package. In fact, a whopping 71.6 percent of companies in the US offer fringe benefits. Plus, you may be able to recoup some of the money you spend by deducting certain benefits as a business cost. For the complete rules, check out IRS Publication 15-B.
Two of the most common are the de minimis fringe benefit and the working condition fringe benefit.
1 – De Minimis Fringe Benefits
A de minimis fringe benefit is defined in the Internal Revenue Code as property or services with a value so small that accounting for it is unreasonable or administratively impracticable for the employer.
There is no specific dollar amount that if exceeded automatically makes a benefit more than de minimis. However, an unofficial guideline is around $75, as the IRS has specifically provided that $100 would not be considered de minimis.
2 – Working Condition Fringe Benefits
This type of fringe benefit includes property or services that, had you paid for it, would have been deductible on your tax return as an unreimbursed business expense. However, in order to be considered a working condition fringe benefit that is excluded from your taxable wages, the benefit must relate to the employer’s business, must be deductible if paid personally, and the business use must be documented with records (such as receipts).
Here are Fringe benefits you will have to submit to the IRS
- Accounting Rules
- No-Additional-Cost Fringe Benefits
- Travel and Transportation Expenses
- Moving expenses
- Meals and lodging
- What you can report to the IRS:
- Gift Cards or Cash Equivalents
- Prizes and Awards
- Regularly Provided Snacks
- Gym Membership
- Personal Use of Company Car
Which fringe benefits are NOT taxable?
The IRS defines some benefits as non-taxable. This means that they’re exempt, or excused, from federal taxes (although not necessarily state or local taxes).
- Accident and health benefits to help employees and their families – Non-taxable for most employees, excluding certain long-term care benefits, which are not exempt from income tax
- Achievement awards for high-performing employees – Non-taxable for most employees up to $1,600, as long as the achievement is given under a “qualified plan,” which is an established program that isn’t designed for well-compensated employees. Otherwise, the exemption limit is $400.
- Adoption assistance – Non-taxable for most employees for income taxes, but taxable under Social Security, Medicare, and unemployment taxes
- Gym membership – Non-taxable if your company owns the gym (and owns or leases the property) and the only users are your employees and their immediate family members
- De minimis (minor, non-cash) benefits, like an inexpensive birthday or holiday gifts, occasional parties, or personal use of a printer – Non-taxable
- Dependent care assistance – Non-taxable for most employees up to $5,000, or $2,500 for married employees who file separate tax returns
- Educational assistance, like tuition reimbursements – Up to $5,250 each year is non-taxable
- Employee discounts for your own goods or services – Exempt for most employees, as long as you aren’t discounting your services by more than 20 percent or your physical goods by more than the gross profit percentage (the net sales, minus the cost of the goods) of what you’d charge a customer
- Employee stock options – Non-taxable in some cases, although there are some tricky rules surrounding stock options. Talk to an attorney about this one.
- Employer-provided cell phones – Non-taxable, as long as they’re mostly used for business purposes
- Group-term life insurance – Non-taxable for most employees, but Social Security and Medicare taxes are only exempt for up to $50,000 of coverage
- Health savings accounts (HSAs) – Non-taxable up to $3,500 for employee-only coverage and $7,000 for family coverage, as long as your employee has an eligible high-deductible health plan (HDHP)
- Lodging on business premises, like a rented basement for an on-site nanny – Non-taxable for most employees, assuming your employees’ lodging is for your convenience and is a condition of employment
- Meals – Non-taxable for most employees—but, like lodging, it must be for your convenience (like to encourage employees to get to know each other). De minimis meals, like the occasional party, are also exempt.
- No-additional-cost perks, like providing free hotel rooms to employees if you run a hotel – Non-taxable for most employees
- Transportation benefits, like transit passes or qualified parking – Up to $265 per month is non-taxable. This includes things like parking, commuter passes, or transit passes. De minimis transportation expenses, like driving an employee to a work event, are exempt as well.
- Working condition benefits, like a company computer – Non-taxable
With increased attention being paid to the taxation of fringe benefits by the IRS, employers should carefully review the rules related to fringe benefits to ensure the proper exclusion from income by employees or the proper inclusion, withholding and reporting in the cases where fringe benefits are taxable. While every employer has the responsibility to properly report its employees wages, each individual is ultimately responsible for correctly reporting their income to the IRS.
If you receive any of the benefits described above, ask questions. The best place to start is by reaching out to Certified Payroll Reporting, our team can help you make the best decisions for your Fringe Benefits. Make sure that you report the value of any taxable fringe benefits as income on your tax return, whether or not your employer correctly includes them in W-2 wages. This blog was written and published by the AutomationLinks content team.