Identifying and Reporting Employee Fringe Benefits
What are fringe benefits?
Fringe benefits are a form of pay, often from employers to employees, and considered compensation for services beyond the employee's normal rate of pay. They can be made in the form of property, services, cash, or cash equivalents. Cash equivalents are things that can be turned into cash fairly quickly, such as savings bonds. Generally, fringe benefits are taxable to the employee, must be included as supplemental income on the employee's W-2, and are subject to withholding and employment taxes. The Internal Revenue Service (IRS) provides guidance on fringe benefits in a publication titled, Employer's Tax Guide to Fringe Benefits For use in 2013.
It’s important for employers to distinguish between taxable fringe benefits and nontaxable fringe benefits so they can understand how they are valued and report them properly.
Examples of taxable fringe benefits
- Vacation, athletic club membership, or health resort expenses
- Value of the personal use of an employer-provided vehicle
- Amounts paid to employees for moving expenses in excess of actual expenses
- Business frequent-flyer miles converted to cash
- Group term life insurance provided to employees in excess of $50,000
Examples of fringe benefits excluded from gross income
- Employer-provided spending accounts such as medical flexible spending accounts and dependent care accounts
- Payments made on employees' behalf for public transportation to and from work and parking while at work
- Up to $5,000 paid by the employer for child- or dependent-care services
- Group term life insurance provided to employees, up to $50,000
- No-additional-cost services such as complimentary flights for airline employees
- Employee discounts
- Working condition fringe benefits such as the use of company vehicles
- Tuition reduction
- De minimis fringe benefits such as employee use of office equipment, holiday gifts, parties or picnics, and entertainment events. In this category the value of the property should be considered minimal
- Athletic facilities primarily used by employees, if located at the place of employment
- Retirement planning services
- Adoption assistance program
- Use of business frequent flyer miles for personal travel
- Moving expense reimbursements for actual costs paid or incurred
Valuing fringe benefits
The general rule for placing a value on a fringe benefit is to use the fair market value of the benefit given. In many cases, the fair market value and the cost of the item are the same. The fair market value is typically what a willing buyer would pay for the item and may be higher than the cost if the employer was able to purchase the item for a price lower than the fair market value. There are also various categories of different types of fringe benefits where the IRS provides guidelines for valuation. Leased vehicles provided to employees for personal use is one example. Additional information from the IRS can be found in their FSLG Fringe Benefit Guide.
Employer tax treatment
The reporting requirements differ based on who receives the benefit. For example, taxable fringe benefits paid by the employer to an employee are included in the employee's annual W-2 statement, but taxable fringe benefits paid to independent contractors are reported on the Form 1099 miscellaneous. Taxable fringe benefits paid to partners are reported on Schedule K-1 (Form 1065).