Taxable Fringe Benefit Guide

Taxable Fringe Benefit Guide

Tax Treatment of Fringe Benefits

The term “fringe benefit” refers to any benefit provided to an employee that is in addition to money. All benefits provided to an employee are taxable unless the law specifically excludes or defers tax on the benefit. Thus, a fringe benefit can be taxable, tax-deferred, or excluded from taxation. The personal use of an employer-provided vehicle is an example of a taxable fringe benefit. An employer contribution to a qualified retirement plan on behalf of the employee is an example of a tax-deferred fringe benefit. Employer-provided health insurance for an employee is an example of a tax-free fringe benefit.

Business Owner

A small business owner in a corporate setting may be both the owner and an employee of his or her business. By taking advantage of excludable fringe benefits, the owner receives a double benefit. First, the cost of the benefit is deductible by the business. Second, the cost of the benefit is tax-free to the employee-owner.

Nondiscrimination Rules for Fringe Benefits

Nondiscrimination rules are designed to prevent business owners from offering tax-favored fringe benefits to themselves but not their employees. In general, if fringe benefits are offered to all employees, then all employees, including the top-paid employees, receive tax-favored treatment on employee benefits. However, if a plan favors highly-compensated employees or key employees, the value of the benefit must be included in their taxable wages. The terms “highly-compensated employees” and “key employees” can mean different things depending on the applicable plan. Special restrictions apply for fringe benefits for sole
proprietors, partners, certain LLC members, and S corporation shareholders. Contact us if you are a business owner considering providing fringe benefits to yourself and your employees.

Employer-Provided Vehicles

If an employer provides an employee with a company-owned vehicle, the employer must include the value of any personal use in the employee’s Form W-2 as other compensation. Social Security and Medicare tax must be withheld. Federal income tax withholding is optional if the employee was notified and the value of the benefit is included in boxes 1, 3, 5, and 14 of Form W-2. The employer has several options on how to calculate the value of the benefit.

  • General valuation,
  • Annual lease value method,
  • Cents-per-mile method, and
  • Commuting value method.

Employer-Provided Cell Phones

The value of an employer-provided cell phone, provided primarily for non-compensatory business reasons, is excludable from an employee’s income.

Noncompensatory Business Purposes

An employer needs substantial business reasons for providing the cell phone. Examples include:

  • Need to contact the employee at all times for work-related
  • Requirement that the employee be available to speak
    with clients at times when the employee is away from the
    office, and
  • Need to speak with clients located in other time zones at
    times outside the employee’s normal workday.

The value of cell phones provided to promote goodwill, boost morale, or attract prospective employees cannot be excluded from an employee’s wage.

Dependent Care Assistance

Up to $5,000 ($2,500 for Married Filing Separately filing status) of dependent care benefits provided under a dependent care assistance program is excludable from taxable wages. Although these benefits are reported in box 10 of the employee’s Form W-2, they are not taxable if used for providing qualified care. The benefits are reported with the tax return on Form 2441, Child and Dependent Care Expenses. If benefits received are more than the amount that can be excluded, the excess is included as taxable wages on Form 1040. If an employee receives dependent care benefits, it is still possible for the employee to claim a tax credit for expenses in excess of benefits.

Other Fringe Benefits

Additional fringe benefits for employees may include:

  • Use of on-premises athletic facilities.
  • Low-value or de minimis benefits.
  • Employee discounts.
  • Up to $50,000 group-term life insurance.
  • Health benefits.
  • Certain business-related meals and lodging.
  • Moving expenses.*
  • Up to $5,250 of educational assistance.
  • Up to $15,950 of adoption assistance.
  • Transportation benefits.
  • Certain benefits provided as a working condition.

Some examples of taxable fringe benefits include bonuses, vacation time, gym memberships, or health resort expenses.

* For tax years 2018 through 2025, the qualified moving expense deduction is allowed only for members of the Armed Forces (or their spouses or dependents) on active duty that move because of a military order and incident to a permanent change of station.

Cafeteria Plans

A cafeteria plan allows employees to choose between receiving taxable compensation or a qualified benefit for which the law provides an exclusion from taxation. If the employee chooses the benefit, it is excluded from taxation. Cafeteria plans are sometimes referred to as “flex plans,” “flexible spending arrangements,” or “FSAs.”

Nondiscrimination Rules Apply to the Following:

Cafeteria PlansHighly-compensated employees:
• Officer of corporation
• More than 5% shareholder
• Highly-compensated employee based on
facts and circumstances
• Spouse or dependent of aboveKey employees:
• Officer having annual pay of more than:
2023 2022 2021
$215,000 $200,000 $185,000
• 5% owner-employee
• 1% owner-employee with annual pay
more than $150,000
Self-Insured Medical
Reimbursement Plans
Highly-compensated employees:
• One of five highest paid officers
• Employee owning more than 10% of
employer’s stock
• Highest paid 25% of all employees
Adoption Assistance

Dependent Care Assistance

Educational Assistance

Employee Discounts

Health Savings Accounts

Meals Provided at Employer-
Operated Eating Facilities

No-Additional-Cost Service

Highly-compensated employees:
• 5% owner-employee at any time during
year or preceding year
• Employee with annual pay for preceding
year more than:
2023 2022 2021
$150,000 $135,000 $130,000
This test can be ignored if employee was
not also in top 20% of employees.
Group-Term Life InsuranceKey employees:
• Officer having annual pay of more than:
2023 2022 2021
$215,000 $200,000 $185,000
• 5% owner-employee
• 1% owner-employee with annual pay more
than $150,000

General Valuation Rule

“Generally, taxable fringe benefits are valued at their fair market value (FMV). FMV is the amount a willing buyer would pay an unrelated willing seller, neither one forced to conduct the transaction and both having reasonable knowledge of the facts. In many cases, the cost and FMV are the same; however, there are many situations in which FMV and cost differ, such as when the employer incurs a cost less than the value to provide the benefit.” – The IRS Taxable Fringe Benefit Guide 

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2023-10-30T16:18:23+00:00June 8th, 2023|Business, Tax|

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