Taxable Fringe Benefits: Everything You Need to Know
Taxable fringe benefits are defined as those benefits an employer makes available to any employee, partner or independent contractor. 4 min read
2. Tax-Free Employee Fringe Benefits
3. De Minimis Fringe Benefits
4. Working Condition Fringe Benefits
5. How to Avoid Under-Reporting Your Income
Taxable Fringe Benefits
Taxable fringe benefits are defined as those benefits an employer makes available to any employee, partner, or independent contractor. If you are a recipient of any taxable fringe benefits, you must include the benefit’s fair market value in your annual taxable income calculation. Taxable fringe benefits are subjected to all federal income taxes, as well as FICA and FUTA.
Employees who currently use their own car for business-related driving must take care not to exceed the IRS stated mileage rate as any payments for the excess amount would be considered taxable income.
The following are examples as taxable fringe benefits:
- Any reimbursement for any employee job-related moves of fewer than 50 miles
- Clothing that is suitable for street wear that has been given to employees
- Educational assistance payments that do not relate to the employee’s job or exceed the allowable IRS threshold
- Cash awards and non-cash awards are taxable unless given to charity
- Expense reimbursements lacking an adequate accounting is taxable
A working condition fringe benefit that is used for personal use has to be included in the employee’s compensation. The default position remains that all fringe benefits are subject to taxation unless the benefit has been specifically classified as tax-exempt. Taxable fringe benefits have to be included as income on an employee’s tax return. A detailed description of the rules that apply to specific fringe benefits can be found in IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits. As stated in this IRS publication, a fringe benefit that is provided to employees must comply with all rules, or the result will be taxable income for the employee.
Tax-Free Employee Fringe Benefits
Several examples of tax-free fringe benefits are as follows:
- Accident and health insurance benefits
- Any benefits related to achievement awards
- Adoption assistance benefits
- De minimis benefits
- Dependent care assistance
- Educational assistance
- Employee discount benefits
- Employee stock option benefits
- Group long-term life insurance
- Health savings accounts (HSA) benefits
- Lodging on business premises benefits
- Meals benefits
- Moving expense reimbursements benefits
- No-additional-cost services benefits
- Retirement planning services benefits
- Commuting benefits
- Tuition reduction benefits
- Working conditions benefits
De Minimis Fringe Benefits
Fringe benefits of value are required to be included on your income tax filing unless IRS regulations offer an exception that make the fringe benefits nontaxable. There are several nontaxable fringe benefits, but the two most common are fringe benefits of de minimis value as well as the working condition fringe benefit. A de minimis fringe benefit can be defined in the IRS Code as any property or services of small value, so much so that an accounting of its value would be deemed unreasonable or impracticable for any employer to undertake. While there isn’t a specific dollar amount that would classify a fringe benefit as de minimis, the unofficial guideline seems to be roughly $75 given that the IRS has specifically stated that $100 would not be considered de minimis.
The following are examples of de minimis fringe benefits:
- Personal usage of a photocopy machine
- Employee picnic expenses
- Sporting event or theater ticket expenses
- Coffee, donuts, or soft drink expenses
- Flowers for special occasions or other non-cash special occasion gifts
Working Condition Fringe Benefits
Working Condition Fringe Benefits are a fringe benefit that includes any property or service that if you as an employee would have paid for would have resulted in the ability to take a tax deduction for an unreimbursed business expense. A working condition fringe benefit must relate to an employer’s business relationship, must be personally deductible, and documented in order for the fringe benefit to be excluded from an employee’s taxable wage.
The following are examples of working condition fringe benefits:
- The cost of any lunch or dinner at which business has been conducted
- Conference attendance related to an employee’s job
- Travel required to attend a client meeting
How to Avoid Under-Reporting Your Income
Despite the amount, any gift cards received or other cash equivalents provided are required to be reported in an employee’s wages. If an employer provides snacks for its employees on a regular basis, the regulations require that the value of the snacks be included in an employee’s taxable wages. In addition, if an employer provides a company car and an employee uses the car for personal use, that personal use should be included in taxable wages as well.
Bear in mind that while it is the responsibility of every employer to properly report the wages of its employees, each employee is ultimately responsible for accurately reporting any earned income to the IRS. It is incumbent upon each employee to track those benefits they believe are taxable as well as the value of that benefit, even if your employer has already reported all your wages. The last thing you would want is to subject yourself to any tax penalties from the IRS for under-reporting your wages.
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