What are fringe benefits and which of them should be considered part of an employee's taxable pay? In the following FAQs, we answer questions most often asked by employers regarding fringe benefits, often considered compensation beyond the employee's normal wages.
What are fringe benefits?
Fringe benefits for employees can take the form of property, services, cash, or some cash equivalent (something that can be turned into cash, such as a gift card or savings bonds). Generally speaking, fringe benefits are taxable to the employee and must be included as supplemental income on the employee's W-2 form. These fringe benefits are also generally subject to withholding and employment taxes.
What are the potential advantages of offering fringe benefits to employees?
For many small businesses, offering fringe benefits may be a way to differentiate themselves from the competition and to attract and retain new employees. At the same time, employers who choose to offer such benefits need to be aware of federal (and state if applicable) income tax withholding requirements. These benefits are considered taxable income unless specifically excluded by current tax laws.
Are employee bonuses considered a fringe benefit?
Yes. Because bonuses take the form of cash (or a cash equivalent), they must be reported as supplemental income on the employee's W-2. The fair market value of such bonuses, regardless of how much money is involved, must be reported.
Is vacation time considered a fringe benefit under federal tax law?
Yes, just like employee bonuses.
Is reimbursement for a business trip considered a fringe benefit?
Reimbursements received by an employee who travels on business outside of the area of his/her tax home may be excludable from wages. Qualifying expenses for travel are excludable if they are incurred for temporary travel on business away from the general area of the employee’s tax home. In order to be excludable as reimbursements, the travel must be temporary and be substantially longer than an ordinary day's work, requiring an overnight stay or substantial sleep or rest. IRC §162(a)(2) RR 75-170
Is use of a company car considered an employee benefit?
Yes. The IRS indicates that when an employee uses a company car for occasional personal driving, the value must be reported in the employee's income. Frequently, the employee reports "a percentage of the car's annual lease value as determined by IRS tables."
What other employee benefits are regarded as taxable?
Other taxable employee benefits include:
- Athletic club membership or health resort expenses
- The amount provided to employees for moving expenses, in excess of actual expenses
- Business frequent-flyer miles converted to cash
- Group term life insurance for employees amounting to more than $50,000
What employee benefits are not considered taxable?
Among non-taxable employee perks are those known as "De Minimis" fringe benefits. These include property or services provided by an employer of such a small value that accounting for them would be unreasonable. These may include:
- Soft drinks, coffee, doughnuts
- Personal use of an office copy machine
- Occasional tickets to a theater production, concert or other type of entertainment
- Non-cash holiday gifts
When are taxable fringe benefits subject to withholding?
Taxable fringe benefits are generally subject to withholding when they are made available. Employees can elect to treat taxable fringe benefits as paid in a pay period (quarterly, semi-annually, or annually), but all benefits must be treated as paid by December 31 of the calendar year in which they were provided.
For more detailed information on fringe benefits (taxable and non-taxable), consult the IRS publication, Employer's Tax Guide to Fringe Benefits.