What Employee Fringe Benefits Are Tax-Free & Taxable

What Employee Fringe Benefits Are Tax-Free & Taxable

An employee fringe benefit is a form of pay other than money for the performance of services by employees. Any fringe benefit provided to an employee is taxable income for that person unless the tax law specifically excludes it from taxation. Taxable fringe benefits must be included as income on the employee’s W-2 and are subject to withholding taxes.

Fortunately, there is a long list of fringe benefits that are tax-free and need not be included in the recipient’s compensation. Tax-free employee fringe benefits include:

  1. Health Insurance
  2. Accident Insurance
  3. Health Savings Accounts
  4. Dependent Care Assistance
  5. Educational Assistance
  6. Group Term Life Insurance
  7. Qualified employee plans including profit-sharing plans, 401K’s,etc
  8. Lodging on your business premises
  9. Moving expense reimbursements
  10. Commuting benefits
  11. Employee discounts on goods and services
  12. low0cost fringe benefits such as birthday or Holiday gifts, event tickets, coffee and soft drinks, and other special occasion gifts
  13. working condition fringe benefits-that is, property and services provided to an employee so that the employee can perform his or her job
  14. cafeteria plans that allow employees to choose among two or more benefits consisting of cash and qualified benefits

A further discussion of all the rules is contained in IRS Publication 15-B. Any benefit that does not comply with these rules is taxable income to the employee, and included in the employee’s W-2 Form. For example, meals given to an employee who is required to be away from home overnight for rest is a tax-free benefit, while non-overnight meals do not comply with the rules.

Other taxable benefits include:

  1. Excessive mileage reimbursement-payments to an employee for business-related driving in his or her car that exceed the standard mileage rate
  2. Moving Expenses-reimbursements of expenses for employees of less than 50 miles are taxable
  3. Clothing-clothing given to employees suitable for street wear is a taxable fringe benefit
  4. Expense reimbursements without adequate documentation-an employee must provide adequate accounting to employer foe any expense reimbursement or it will be taxable income to the employee.

Working Condition Fringes

A working condition fringe benefit is tax-free to an employee to the extent the employee would be able to deduct the cost of the property or services as a business or depreciation expense if they had paid for it. If the employee uses the benefit 100% for work it is tax-free to him. However, the value of any personal use of a working condition benefit must be included in the employee’s compensation, Also, the employee must meet any documentation requirements that may apply to the deduction.

One of the most common working condition benefits is a company car. If an employee uses a company car part of the time for personal use, the value of the personal usage must be included in the employee’s income. The employer determines how to value the use of a car, and there are several methods that may be used. The most common is for the employer to report the percentage of the car’s annaul lease value as determined by IRS tables–refer to IRS Publication 15-B for further details.