As the economy continue to grow rapidly, it is very hard to find qualified employees. Companies large and small are not only offering competitive pay but also are offering many Fringe Benefits. In this article, Lets learn How Tax Law Applies to Fringe Benefits.
Certain fringe benefits you receive from your employer are non-taxable. For example, a company phone or apartment is tax-exempt.
But if those same benefits are in the form of cash payments or are for personal use, the taxability is not so clear. Therefore, to avoid tax penalties, you should stay abreast of the latest tax guidelines.
Let’s look at a few common examples below to better understand how tax laws apply to fringe benefits.
- 1 Transportation
- 2 Health Insurance
- 3 Retirement Fringe Benefits
- 4 Family and Medical Leave
- 5 Worker’s Compensation
- 6 Tuition
- 7 Dependent Care
- 8 Company Phones
- 9 Meals and Beverages
- 10 Gyms
- 11 Employee Discounts on Products and Services
- 12 Awards
- 13 Get Your Tax Questions Answered
- 14 Learn More
Employers must include regular transportation fees as part of an employee’s taxable benefit. But if the employer rarely pays for this service, and if the benefit isn’t based on hours worked, it’s tax-exempt.
What’s more, employers and employees can both exclude qualifying transit passes that cost less than $21 per month. However, these passes must be solely for commutes to work.
Also, you can exclude public transportation vouchers worth less than $21 per month, but only if you can’t exchange these vouchers for cash.
As a side note, you should also be aware that tax exemptions don’t apply to payments for personal transportation. For example, rides provided to keep an employee safe are a taxable cost.
If your employer offers health insurance for you, your spouse, or your dependents, this is a tax-free benefit.
The health insurance premiums employers pay for their employees are exempt from federal income taxes. Additionally, any portion of employer-provided health insurance premiums paid by employees is not taxable. However, these premiums are subject to social security and Medicare taxes.
As a tax-payer, remember to report these amounts on the W-2 forms at the end of the year.
Health Savings Accounts (HSAs)
Health savings accounts are tax-free savings accounts that enable workers to save money for medical bills before taxes. If you are an HSA participant, you can use your HSA funds to pay for qualified medical expenses without paying any extra federal income tax on the money in your account.
Retirement Fringe Benefits
Another non-taxable fringe benefit is the provision of retirement planning advice. But this only applies if there is a qualified retirement plan in place. Section 218 of the Internal Revenue Code can help you figure out if a retirement plan is qualified.
The tax exclusion for retirement plans does not apply to certain services, including accounting, tax preparation fees, and brokerage services involved in retirement. In addition, employers must also pay taxes on employee retirement plans that are available to top earners but not to all employees.
Family and Medical Leave
The IRS has not said whether they will tax family and medical leave benefits.
The Department of Family and Medical Leave offers employees the choice of having state and federal taxes withheld from their paychecks. If you opt for this, the DFML will withhold 10% for federal taxes and 5% for state taxes. These are reductions that the Department has set; the IRS doesn’t mandate any reductions.
If you decide to have taxes withheld, the percentages will remain fixed once the DFML approves your application. But you can cancel your application before it completes the approval process.
Many people believe that worker’s compensation is a fringe benefit. However, worker’s comp is required by law, so this qualifies it from the list of fringe perks. Still, worker’s compensation payments are not taxed, which can save employers and employees money during tax season.
Under an educational assistance program, tuition is a tax-free fringe benefit. This exclusion applies to employees, retirees, disabled workers, and their dependents. Widowers are also eligible for this exclusion.
Employers may also receive exemptions for student loan payments if they fall under chapter 10 of the IRS publication 970.
What Is an Educational Assistance Program?
Educational assistance programs provide financial aid to employees to help them get college degrees, certificates, or other training. These programs can only cover the cost of books, lab equipment, tuition, and supplies. Each year, the IRS enables employers to contribute up to $5,250 in tax-free help per worker.
The cost of supplies that an employee keeps at the end of their course, as well as any meals or transportation costs, are not exempt from taxes. Similarly, expenses for hobbies, games, or sports aren’t a part of the $5,250 exclusion unless they are required by the degree program or are part of the employee’s job.
Dependent care services provided to an employee are not taxable as long as they are under the employer’s dependent care assistance program. To qualify for the exemption, the only reason an employee can get these services must be because he or she is working.
Current workers, leased employees, sole proprietors, and business partners can qualify for the dependent care tax exclusion. They are all considered employees, according to the IRS.
Under a DCAP, a company’s employees can exclude up to $5,000 of benefits received from the plan each year. If a married employee is filing separate taxes from their spouse, this amount drops to $2,500.
As a rule of thumb, the employee’s share of non-taxable dependent care benefits can’t be more than the smaller of the earned income between them and their spouse. If the spouse does not have an income, the IRS will determine whether the benefits meet the requirement.
You must note DCAP payments from your company in box 10 of the employee’s Form W-2. Include any parts of the DCAP payment that do not qualify for the exclusion in boxes 1, 3, and 5.
Tax Exceptions for DCAP Benefits
You must include dependent care assistance in the wages of an employee if the employee owns 5% of the company or receives more than $130,000 in wages per year. However, you may ignore the salary requirements if the employee was not in the top 20% of earners in the company.
Employer-provided cell phones are not taxable because they are a working condition fringe benefit. If you use the phone for personal reasons, that amount is also excludable from your income because it is a de minimis benefit.
The only reason the exemption applies is if there are substantial business reasons for providing the cell phone. A common reason is that a company needs to be able to contact an employee at all times due to the person’s responsibility in the business.
In general, if a phone is provided to an employee by an employer as additional compensation or as a means of boosting their work morale, the phone is considered taxable income.
Meals and Beverages
Occasional meals you provide to employees are non-taxable. For example, if you buy coffee for your workers every few weeks, this is not considered additional compensation, and therefore it is tax-exempt.
The tax code also excludes meals provided by the employers at on-site eating facilities. But this is only true when the annual revenue from those facilities exceeds their costs.
As for special meals given to workers who make more than $130,000 annually or own at least 5% of the company, the value must be included in the employee’s pay. Hence, the amount is taxable.
The value of on-premises gym memberships is tax-exempt as Fringe Benefits. But this only applies if gym access is restricted to employees, their spouses, and dependent children.
The gym must be owned by the employer, but it does not have to be on the business premises.
The tax break for gym memberships does not apply to an athletic establishment that is a residential facility, such as gyms available at a holiday resort. The exclusion also doesn’t apply to public gym use.
Employee Discounts on Products and Services
Luckily for employees, employee discounts are tax-free. The tax exemption applies to both free and reduced-price products and services. It also applies to partial or total cash rebates.
Employee discount tax exclusions do not apply to discounts on real estate, stocks, or bonds. The tax break also doesn’t apply to goods sold in an employee-only store that does not serve regular customers.
If you receive a discount at another employer because you are an employee of your company, this discount is not taxable. However, if such discounts are given through a deal between companies to provide discounts to each other’s employees, the value will be taxable.
Achievement awards are eligible for tax exclusions. However, the exclusion does not apply to awards of cash, gift cards and certificates, or cash equivalents. The exclusion also doesn’t cover entertainment, food, living accommodations, and similar items.
In sum, only physical properties given as awards receive tax exemptions as fringe benefits in the United States.
Get Your Tax Questions Answered
If you exclude the value of employer-provided transportation, health insurance, dependent care, and other fringe benefits from your taxable income, you’ll save a good chunk of your hard-earned money. Of course, there are exceptions to this rule when you earn more than $130,000 or have a 5% stake in the company. But in these cases, your tax burden will probably not be as much of a concern.
Now that you have read our article, How Tax Law Applies to Fringe Benefits, Take this information and keep it in mind as you work with your individual fringe benefits. You can also refer to our other tax articles if you get stuck on a specific issue.