Posted by Fred Lake

Taxable Fringe Benefits

Taxable Fringe Benefits

A "fringe benefit" for employees is a form of payment other than cash for the performance of services by employees. Any fringe benefit granted to an employee constitutes taxable income for that person unless the tax laws specifically exclude them from taxation. Taxable fringe benefits must be included as income on the employee's W-2 form and are subject to withholding tax.

Fortunately, there is a long list of tax-exempt benefits and should not be included in the recipient's compensation. Fringe benefits for non-taxable employees include:

  • Accommodation on your business premises 

  • Achievements award

  • Additional unemployment benefit

  • Cafeteria plans that allow employees to choose between two or more benefits consisting of cash benefits and qualifying benefits, 

  • Care for dependents

  • Commuting benefits (without taxes for employees, but not deductible by employers over the 2018-2025 period)

  • De minimis fringe benefit, such as a low-value birthday or party gifts, event tickets, traditional rewards (such as a retirement gift), other gifts for special occasions, coffee, tea, and soft drinks.

  • Disability insurance

  • Discounts for employees on goods or services sold by the employer

  • Educational assistance

  • Employee stock options

  • Group life insurance coverage: limits apply to depend on the value of the contract

  • Health insurance (up to certain dollar amounts)

  • Health savings accounts

  • Insurance for injuries

  • Parking expense assistance (no taxes for employees, but not deductible by employers over the 2018-2025 period)

  • Qualified employee benefit plans, including incentive plans, stock bonus plans, and cash purchase plans

  • Working conditions fringe benefits.

Any benefit granted to an employee who does not comply with these rules constitutes taxable income for that employee. For example, meals offered to an employee who must be absent at home overnight to rest are tax-free fringe benefits. But non-overnight meals do not respect this rule and are therefore taxable.

Here are some of the more common employee fringe benefits that are taxable to the employee:

  • Awards and recognitions: Cash prizes are taxable unless awarded to charitable organizations. Non-cash prizes are taxable unless they have face value or are awarded to charitable organizations.

  • Bike Commuting: Until 2018, employers could also offer up to $20 per month for employees who commute to work by bicycle. The TCJA makes this benefit taxable for employees from 2018 to 2025.

  • Clothing: Clothing delivered to employees and suitable for streetwear is an additional taxable benefit.

  • Excess Mileage Reimbursements: Payments to an employee for driving for business purposes that exceed the standard IRS mileage rate are taxable income.

  • Excessive Educational Reimbursement: Payments for educational assistance that are not work-related or exceed the IRS allowance are taxable.

  • Moving expenses: In the past, employees who moved more than 50 miles to their current job (not a new job) could receive tax-free reimbursement from their employer for moving expenses. The TCJA imposed this fringe benefit from 2018 to 2025. Reimbursement of moving expenses for employees under 50 miles has always been taxable.

  • Reimbursement of expenses without proper accounting: The employee must provide adequate accounting for any expense reimbursement, or it will be taxable income.

  • Fringes of working conditions: A fringe benefit for working conditions is a tax exemption for an employee. The employee can deduct the goods or services' cost as a business or depreciation expenses if she or he has paid. If the employee uses the benefit completely to work, it is tax-exempt. But the value of any personal use of a fringe benefit for working conditions must be included in the employee's salary, and the employee must pay taxes on it. The employee must meet the documentation requirements that apply to the deduction.

Example 1: John, the owner of a small insurance firm, rents a computer and gives it to his employee Tom to do some design work at home. If Tom uses the computer 100% for his work, it is tax-free for him. But if he only uses 50% of the time for work and 50% of the time for personal purposes, he would have to pay income tax for 50% of its value. 

Personal use-value is calculated based on the fair market value of the benefit.

Example 2: John pays $ 200 a month to rent the computer he gave Tom. If Tom uses the computer 50% of the time for work and 50% of the time for nondeductible personal use, he will have to add $100 per month to his taxable compensation.



Fred Lake
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