CARL WATTS & ASSOCIATES

October 20, 2014

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Taxable Fringe Benefits
There are many kinds of fringe benefits that your employer may offer as nonpayment compensation. But, as far as taxation is concerned, there are four categories of employment benefits.

Tax free employee benefits are not included in your income and, therefore, they’re not subject to withholdings, social security and Medicare tax.

Health care, educational assistance, transportation benefits, group term life insurance, these are just a few examples of tax free benefits.

In the case of tax-deferred benefits, employers report the benefit to the IRS as employee income, but the employee does not have to pay taxes on it until later when certain conditions have been met (as is the case with qualified retirement plans).

There are also partially taxable fringe benefits, meaning you could be taxed for the value of the fringe benefit that exceeds an annual limit set by the IRS.

And there are, of course, employee benefits that are taxable, which are the subject of this newsletter.

Fringe benefit taxes are intended to ensure that workers in a specific (high) income bracket, regardless of whether or not they receive rich fringe benefits, pay an equal percentage of their income in taxes. The tax also prevents companies from helping employees evade tax payments, compensating them with goods instead of a paycheck.

There are two types of fringe benefits that are sometimes less understood and easily overlooked when it comes to taxation.

One type is called De Minimis fringe benefits. They are 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, the IRS has specifically provided that $100 would not be considered de minimis.

Here are some examples of de minimis fringe benefits which are not taxable so long as they are provided infrequently: personal use of a photocopier; employee picnics; sporting event or theater tickets; coffee, donuts, or soft drinks; flowers for special occasions or non-cash holiday gifts.

And here are examples of benefits that would not be considered de minimis and, therefore, should be included in taxable wages:

  • Cash or cash equivalents,
  • Use of employer’s vacation home or boat,
  • Country club or athletic facility dues.

The second type is called Working Condition Fringe Benefits. 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.
Examples of working condition fringe benefits include traveling to attend a client meeting, the cost of lunch or dinner where business is conducted, or attendance at conferences related to your job.

However, there are some commonly missed sources of income that should be reported.

Gift Cards or Cash Equivalents. If you receive a gift card, no matter how small the amount, it should be reported in wages – even a $5 gift card.

Prizes and Awards. If you win a contest at work and receive an award, that should be included in your wages.

Regularly Provided Snacks. If your company continuously offers complimentary soft drinks and/or snacks are provided on a regular basis and not just occasionally, the value of the snacks should be included in taxable wages.

Gym Membership. If your company promotes preventative wellness and provides you with a gym membership, or a certificate for a massage or complimentary sessions with a personal trainer, then the value should be included in your wages (unless you work at a gym, in which case a different fringe benefit exclusion may apply).



Personal Use of Company Car. One of the most common working condition fringe benefits is a company car. If an employee uses a company car part of the time for personal driving, the value of the personal use must be included in the employee’s income. The employer determines how to value the use of a car, and there are several methods that may be used. The most common is for the employer to report a percentage of the car’s annual lease value as determined by IRS tables.


Here are some more examples of benefits that are sometimes overlooked as a taxable event.


  • 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.

  • Moving expenses. Reimbursement of expenses for employee moves of less than 50 miles are taxable.
  • Clothing. Clothing given to employees that is suitable for street wear is a taxable fringe benefit.
  • Excessive education reimbursements. Payments for educational assistance that is not job related or that exceed the allowable IRS exclusion are taxable.
  • Awards and Prizes. Cash awards are taxable unless given to charity. Non-cash awards are taxable unless nominal in value or given to charity.
  • Expense reimbursements without adequate accounting. An employee must provide an adequate accounting for any expense reimbursement or it will be taxable income.

While it is the employer’s 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 with your company’s payroll department. 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.

You should contact your tax professional to make sure you aren’t setting yourself up for any tax penalties for under-reporting your income.
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