The Taxation of (Some) Fringe Benefits
Fringe benefits are perks to normal compensation that employers can give their employees. The IRS defines fringe benefits as “pay that an employer gives an employee for performing services.”
Examples of fringe benefits:
· Employee discounts
· Food and drinks
· Health insurance
· Life insurance
· Paid leave
· Retirement savings
· Tuition assistance
Are fringe benefits taxable?
Fringe benefits are taxable unless the law specifically excludes taxability. If a benefit is excluded, your employer does not have to include it in your taxable income. The following fringe benefits are generally not taxable (and some are not taxable up to certain limits):
· Educational assistance
· Employee discounts
· Group-term life insurance
· Health benefits
· Health savings accounts (HSAs)
· Meals
· Stock options
Click here for a complete list of exclusions.
How are taxable fringe benefits taxed?
The employer is responsible for withholding and depositing payroll taxes. The general valuation rule, which is the fair market value of the benefit, is used to determine the value of the benefits.
For example, if you receive a $50 gift card, the fair market value of the gift is $50.
A more complicated example is if your employer gives you a company vehicle for personal use. The value is determined by multiplying the standard mileage rate by the total number of miles driven for personal use. Payroll taxes would be withheld for this amount and then included in taxable wages on your W-2.
The employer has two options for taxing fringe benefits:
1. Add the value of fringe benefits to regular wages and apply the regular withholding rate to the total OR
2. Withhold federal income tax at a flat rate of 25%.
What are de minimis benefits?
De minimis benefits are fringe benefits that have so little value that accounting for it would be administratively impractical, so they are not taxable. De minimis benefits include using the copy machine for occasional personal use, free coffee or beverages, or giving everyone a company shirt.
Are expense reimbursements taxable?
Expense reimbursements are very common. Employees personally pay for business-related expenses and then request reimbursement via an expense report.
Expense reimbursements are not taxable or included in wages if the employer has an “accountable” plan with the following three reimbursement requirements:
1. Business purpose – The expense must occur when performing services as an employee.
2. Substantiation – The employee must provide evidence of the amount, time, place, and business purpose of the expense. This information must be provided in a reasonable amount of time, like as a monthly expense report.
3. Return excess amounts – If an employer gives an employee more money than is needed, the employee must return the excess amount in a reasonable amount of time after the expense is incurred.
However, if an employer gives an employee a monthly allowance for business expenses and the employee does not have to submit receipts or return any money that wasn’t spent, the monthly allowance is taxable.
Questions?