What keeps employees happy, engaged, and loyal? Salary, paid time off, health insurance, and retirement benefits are vital parts of the equation, but many employers also give their employees perks — otherwise known as fringe benefits.
You might think of fringe benefits as freebies that don’t impact your taxable income. But that’s not always the case.
Employers don’t have to count certain fringe benefits as employee wages, but others they do. Not including these benefits in employee income — and therefore avoiding federal income tax and employment taxes — can be a costly error for both parties.
What Are Fringe Benefits?
Fringe benefits are any type of pay or perks you receive in addition to your salary. Examples of fringe benefits include:
- Adoption assistance programs
- Cash awards
- Child and dependent care assistance
- Commuting assistance
- Company cars
- Continuing education
- Disability insurance
- Free snacks or meals
- Flexible spending accounts
- Gym memberships
- Health, vision, and dental insurance
- Life insurance
- Moving reimbursements
- Paid time off
- Parental leave
- Retirement plans like 401(k)s or savings incentive match plan for your individual retirement accounts
- Stock options
- Tuition reimbursement
Fringe benefits can be taxable (included in your taxable income and reported on your W-2) or nontaxable (not included in your taxable income and possibly not reported on your W-2). To avoid problems with the IRS, it’s vital to know the difference.
Taxable vs. Nontaxable Fringe Benefits
According to IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits, all fringe benefits are taxable and must be included in the employee’s taxable income unless the law specifically excludes it.
Section 2 of Publication 15-B provides a list of excludable benefits, including:
Accident and Health Benefits
These employee benefits include premiums the employer pays toward health insurance and long-term care insurance. They also include payments made directly to you for medical expense reimbursements.
Your employer can give you property worth up to $1,600 as an award for length or performance of service or safety achievement. The exclusion doesn’t apply to awards of cash, gift cards, or gift certificates.
Your employer can help you cover up to $14,440 in adoption costs without including the benefits in your taxable income.
If your employer provides an on-premises gym or other athletic facility, it can exclude the value of this benefit from your pay. To qualify, the facility can only be available to employees, their spouses, and dependents. The exclusion doesn’t apply if the employer sells membership or rents the facility to the general public.
De Minimis Benefits
De minimis fringe benefits are property and services the employer provides that have so little value that it would be unreasonable or impracticable for the employer to account for them. That includes token holiday gifts, times when you use the company’s copier, flowers, coffee and doughnuts, or occasional theater or sporting event tickets.
There is no specific dollar amount that automatically makes a benefit more than de minimis. However, the IRS usually considers benefits that cost $75 or less to be de minimis. The exclusion doesn’t apply to any cash, gift cards, or gift certificates, no matter how small the amount.
Dependent Care Assistance
These programs help you pay for the cost of the care of a child or other dependent while you work. Employers can exclude up to $5,000 of dependent care benefits from your wages.
Educational assistance programs allow an employer to fully or partially cover costs for your education, including tuition, fees, books, equipment, and supplies. Employers can exclude up to $5,250 of educational benefits from your wages each tax year.
Many employers allow employees to purchase the goods and services offered to customers at a discount. Employers can exclude the value of this discount from your wages up to the following limits: 20% of the price charged to nonemployee customers for services or the business’s gross profit percentage times the price charged to nonemployee customers for merchandise and other property.
Employee Stock Options
Typically, employee stock options aren’t part of your taxable income when the employer grants them. However, you may have to pay tax when you exercise the option (that is, actually purchase the stock) or later sell the stock at a gain.
Employer-Provided Cell Phones
If an employer provides a cell phone you can use for work, the phone’s value isn’t taxable income, even if you occasionally use it for personal use. However, if your employer provides a cell phone without a legitimate business purpose, they must include the phone’s value in your taxable wages.
Group Term-Life Insurance Coverage
Your employer can generally exclude up to $50,000 of group term life insurance coverage from your wages. The employer must include the cost of coverage over that limit in your taxable income.
Health Savings Account (HSA)
For 2022, your employer can contribute up to $3,650 to your HSA or $7,300 to a family HSA without including it in your taxable income.
Lodging on the Business Premises
Employers who provide lodging on their business premises (for example, a household employer who provides a room for a live-in nanny) can exclude the value of that accommodation from your wages.
Employers don’t have to count as wages the value of meals provided as long as the meals are provided on the employer’s business premises and for the employer’s convenience. This exclusion can apply to companies that provide an employee cafeteria and restaurants that allow employees to have a meal before, during, or after their shift.
No-Additional Cost Services
This exclusion applies to employers who provide their normal services to employees without incurring any additional costs. Examples include airline employees taking free flights or hotel employees taking advantage of a free room.
Retirement Planning Services
If your employer provides a retirement plan, such as a 401(k), it can exclude from your wages the value of any retirement planning advice they provide.
Transportation (Commuting) Benefits
Employers who provide transportation and commuting benefits, such as carpooling rides, transit passes or parking permits, can exclude up to $270 of benefits per month from your wages.
If you work for a university or other educational organization that provides reduced tuition to you and your dependents, your employer can exclude the value of that reduction from your gross income.
Working Condition Fringe Benefits
This type of fringe benefit includes property or services that would have been deductible as a business expense if you’d paid for it. The benefit must relate to the employer’s business, and you need to document the business purpose of the expense with records (such as receipts). Examples of working condition fringe benefits include traveling to attend a client meeting, the cost of a business lunch or dinner, or attending professional conferences.
Your employer must include the cost of any fringe benefits that do not fall within this list of exclusions in your taxable income.
Taxable Fringe Benefits
Employers aren’t the only ones who can get into trouble with the IRS for improperly accounting for fringe benefits. As an employee, you should also take notice because you’re responsible for properly reporting your income each calendar year, whether or not you receive a correct Form W-2 from your employer.
The IRS can hold employers liable for Social Security and Medicare taxes they should have withheld on the underreported amounts. The IRS can also audit you and hold you responsible for the income tax owed on the underreported amounts. It can even charge you with tax fraud if you knowingly underreported your income.
There are five fringe benefits employers tend to miss when calculating employees’ income tax withholding and reporting taxable income to the IRS.
1. Gift Cards or Cash Equivalents
If you received a gift card, no matter how small the amount, you should report it as wages — even a $5 gift card.
2. Prizes and Awards
Did you win a contest at work? If so, did you receive an award? What about an iPad as a prize in a raffle? Achievement awards aren’t taxable, but you should include other prizes and awards in your wages.
3. Personal Use of Company Car
Do you use an employer-provided vehicle for work? If you’re also allowed to use it for errands and personal trips on evenings and weekends, you should include the value of that personal use in wages.
4. Moving Expenses
Before the Tax Cuts and Jobs Act of 2017, employers could provide tax-free reimbursement of moving expenses if you moved more than 50 miles away for your job. Moving reimbursements are now a taxable benefit.
5. Expense Reimbursements Under a Nonaccountable Plan
Employers often reimburse employees for business expenses the employee pays out of their own pocket. As long as you and your employer account for reimbursements correctly, they aren’t taxable to you.
Under an accountable plan, you must provide documentation, such as a receipt or invoice, showing the nature and amount of the expense. If your employer reimburses you for more than you actually spent, you have to return the excess to the company within a reasonable timeframe (usually 120 days).
Expense reimbursements under a nonaccountable plan are income, and employers must include them in your wages. For example, if the company gives you $100 per day for meals while traveling and you don’t have to provide receipts for meals or return any unspent funds to your employer, the employer must include that $100 per day in your wages.
A nonaccountable plan is different from a per diem allowance. Per diem is an allowance an employer provides for meals, lodging and incidental expenses you incur while traveling. Per diem amounts aren’t taxable income for you as long as you follow the special rules. The amount you receive must be no more the federal per diem rate and you must file an expense report with your employer within 60 days.
While every employer has the responsibility to report wages accurately, you are ultimately responsible for correctly reporting your income to the IRS. If you receive any of the benefits described above, ask questions.
The best place to start is with your company’s payroll department. Make sure you report the fair market value of any taxable fringe benefits as income on your tax return, whether or not your employer correctly includes them in W-2 wages.
Even if your employer claims to report all wages properly, make sure you keep track of the benefits you believe are taxable and include that value on your tax return. Make sure you aren’t setting yourself up for any tax penalties for underreporting your income.