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Most of you are familiar with the term “fringe benefits” as being an umbrella for different forms of employee compensation provided in addition to wages or base salary, as a pension, insurance coverage, vacation time, etc.
Fringe benefits for employees can even take the form of property, services, cash, or some cash equivalent (something that can be turned into cash, such as a gift card or savings bonds).
Generally, fringe benefits are taxable to the employee and must be included as supplemental income on the employee's W-2 form. These fringe benefits are also generally subject to withholding and employment taxes.
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The IRS specifies that any fringe benefit is taxable and must be included in the recipient's pay unless the law specifically excludes it.
From the taxation point of view, fringe benefits may be:
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Completely taxable, such as bonuses which are always completely taxable, or gift cards. The employer is required by law to assess the dollar value of a particular benefit and report it as part of the employee’s income.
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Non-taxable (such as medical care premiums paid by an employer), |
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Partially taxable (benefits with specific dollar exclusions such as the public transportation subsidy), or
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Tax-deferred (retirement benefits under a 401(k) plan).
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The Internal Revenue Code includes tax exclusion rules for certain types of fringe benefits, such as transportation benefits, meals, achievement awards, educational assistance and dependent care assistance. These tax rules exclude all or part of the value of certain fringe benefits from employees’ pay. In most cases, the excluded benefits are not subject to federal income or employment tax withholding, and are not reported on IRS Form W-2.
In addition, certain fringe benefits may be excludable as de minimis due to the small value and the impracticality of accounting for such amounts. An example of a de minimis benefit might be employer-provided coffee or an occasional ticket to a sporting event. However, cash will never qualify as a de minimis fringe benefit.
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If taxable, the value of fringe benefits that you receive as an employee are included in box 1 of your Form W-2, Wage and Tax Statement, and may also be reported separately in box 12 with the appropriate code.
Taxable fringe benefits provided to independent contractors are generally reported on Form 1099-MISC. Fringe benefits provided to partners in a partnership (or members in a limited liability company) are reported on Schedule K-1. Additionally, certain benefits paid to S corporation shareholders are reported on Form W-2.
The list of fringe benefits that are tax free and need not be included in the recipients' compensation is quite long, although the Tax Cuts and Jobs Act has brought several significant changes to it as of January 1st, 2018.
Tax-free employee fringe benefits include (but are not limited to):
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Health insurance (up to certain dollar amounts) includes providing employees with health, dental, and vision insurance, and paying for uninsured health- related expenses.
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Disability insurance — if the employer pays disability insurance premiums for an employee (and the employee is the beneficiary), the premiums are excluded from the employee’s income, however, the employee must pay income tax on any disability benefits received under the policy (disability payments for the loss of a bodily function or limb are tax free).
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Health Savings Accounts — for 2018, HSA contributions cannot exceed $3,450 for individuals with self-only coverage under a high deductible health plan and $6,900 for individuals with family coverage under an HDHP. Individuals who are age 55 or older may make an additional $1,000 catch-up contribution.
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Dependent care assistance — up to $5,000 in dependent care assistance may be provided to an employee tax free.
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Educational assistance — employers may pay employees up to $5,250 tax free each year for educational expenses such as tuition, fees, and books.
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Group term life insurance coverage —limits apply based on the policy value. |
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Transportation benefits (with the 2018 tax limits) — the tax exclusion for qualified parking benefits is $260 per month. The tax exclusion for commuter highway vehicle and transit passes is $260 per month. The business mileage rate is 54.5 cents per mile. Employers may use this rate to reimburse an employee for business use of a personal vehicle. Under certain conditions, employers may use the rate under the cents-per-mile rule to value the personal use of an employer-provided vehicle.
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De minimis (low-cost) fringe benefits such as low value birthday or holiday gifts, event tickets, traditional awards (such as a retirement gift), other special occasion gifts, and coffee and soft drinks;
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Cafeteria plans that allow employees to choose among two or more benefits consisting of cash and qualified benefits; |
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Working condition fringe benefits — that is, property and services provided to an employee so that the employee can perform his or her job. |
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Other tax-free employee fringe benefits include employee stock options, employee discounts (up to 20% off), meals provided for the employer’s convenience (not deductible by the employer after 2025), adoption assistance, achievement awards (not including cash, gift cards, vacations, meals, lodging, theater or sporting tickets, stocks, or bonds), and retirement planning help, employee gyms, and free services provided to employees.
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| Here are some of the more common fringe benefits provided to employees that are taxable to the employee: |
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Excessive mileage reimbursements — payments to an employee for business- related driving in his or her own car that exceed the IRS standard mileage rate are taxable income.
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Moving expenses — in the past, employees who moved over 50 miles for their current job (not a new job) could receive tax-free reimbursement from their employer for their moving expenses. The Tax Cuts and Jobs Act made this fringe benefit taxable for 2018 through 2025. Reimbursement of expenses for employee moves of less than 50 miles have always been taxable.
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Bicycle commuting — until 2018, employers could also provide up to $20 per month to employees who commuted to work by bicycle. The Tax Cuts and Jobs Act makes this benefit taxable to employees during 2018 through 2025.
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Clothing — clothing given to employees that is suitable for street wear is a taxable fringe benefit.
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Excessive education reimbursements — payments for educational assistance that is not job related or that exceed the allowable IRS exclusion are taxable. |
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Awards and Prizes — cash awards are taxable unless given to charity. Non- cash awards are taxable unless nominal in value or given to charity. |
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Expense reimbursements without adequate accounting — an employee must provide an adequate accounting for any expense reimbursement or it will be taxable income.
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Working condition — a working condition fringe benefit is tax free to an employee to the extent the employee would be able to deduct the cost of the property or services as a business or depreciation expense if he or she had paid for it. If the employee uses the benefit 100% for work, it is tax free. But the value of any personal use of a working condition fringe benefit must be included in the employee’s compensation, and he or she must pay tax on it. The employee must meet any documentation requirements that apply to the deduction.
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Whether you are the provider or the beneficiary of fringe benefits, it is important that you know which benefits are taxable and which are excludable (you can check the IRS guide which is updated every year).
Remember, although every employer has the responsibility to properly report its employees wages, each individual is ultimately responsible for correctly reporting their income to the IRS.
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| Make sure to keep close track of all your fringe benefits throughout the year so you can enjoy all possible tax exclusions and avoid trouble with the IRS. For this, as for all your dealings with taxes and the IRS, our advice is to enroll help from a tax professional. |
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