US taxable fringe benefits explained US taxable fringe benefits explained

US taxable fringe benefits explained
05 Feb 2018

By Mary Lou Sipple

A fringe benefit is a form of pay for the performance of services. An example of a fringe benefit is when an employee is allowed to use a business vehicle to commute to and from work.

A common question is: Are fringe benefits taxable? In general, any fringe benefit that is provided is taxable and must be included in the employee’s pay unless the law specifically excludes it.

Taxable means that the fringe benefit is included in the employee’s wages and reported on Form W-2. Federal income tax, social security tax and Medicare tax are withheld from the value of the benefit unless the employee has already reached the calendar year’s maximum social security limits.

Imputed income

Imputed income is the term the IRS applies to the value of any benefit or service that should be considered income for the purposes of calculating federal taxes. An imputed income benefit is the value of the non-monetary compensation given to an employee by an employer in the form of a benefit.

Fair market value

The general valuation rule is used to determine the value of most fringe benefits. Under this rule, the value of a fringe benefit is its fair market value. The fair market value (FMV) of a fringe benefit is the amount an employee would have to pay a third party in an arm’s length transaction to buy or lease the benefit.

Neither the amount the employee considers to be the value of the fringe benefit, nor the cost incurred to provide the benefit, determines its fair market value. The fair market value of a benefit is reduced by any amount paid by or for the employee. For example, if an employee has a taxable fringe benefit with a market value of $150 and the employee pays $50 for the benefit, the taxable fringe benefit is $100.

Generally, taxable fringe benefits are included in the employee’s wages in the year that the benefit is received. The value of taxable non-cash benefits can be treated as paid on a pay period, quarterly, semi-annually or annually, or on another basis, provided that the benefits are treated as paid no less frequently than annually.

The value of taxable noncash fringe benefits provided during the last two months of the calendar year, or any shorter period within the last two months, can be treated as paid in the next year.

This does not mean that all benefits treated as paid during the last two months of the calendar year can be deferred until the next year. Only the value of benefits actually provided during the last two months of the calendar year can be treated as paid in the next calendar year.

• Additional guidance on taxable fringe benefits can be found in the Employer’s Tax Guide for Fringe Benefits on the IRS website.

Non-taxable fringe benefits include the following:


• Accident and health benefits
• Achievement awards: Exempt up to $1,600 for qualified plan awards, $400 for non-qualified awards
• Adoption assistance
• Athletic facilities: Exempt if substantially all use during the calendar year is by employees, their spouses and their dependent children and if the facility is operated by the employer on premises owned or leased by the employer
• De Minimis (minimal) benefits: Examples include occasional personal use of a company copying machine, holiday gifts other than cash and occasional parties for employees and their guests 
• Dependent care assistance: Exempt up to $5,000 ($2,500 for married employee filing separate return) 
• Educational assistance: Exempt up to $5,250 of benefits each year 
• Employee discounts: An example is discounts for department store employees 
• Employee stock options 
• Employer-provided cell phones 
• Group-term Life insurance coverage: Exempt up to cost of $50,000 coverage 
• Health savings accounts (HSA’s) 
• Lodging on employer’s business premises 
• Meals 
• Moving expense reimbursements 
• No-additional-cost services: An example is free passes for airline employees 
• Retirement planning services 
• Transportation (commuting) benefits: Exempt up to $250 for qualified parking, $130 for rides in a commuter highway vehicle and/or transit passes, or $20 for qualified bicycle commuting 
• Working condition benefits: An example is business use of employer-provided automobile

Excluded benefits are not subject to federal income tax withholding and, in most cases, they are not subject to social security, Medicare, or federal unemployment (FUTA) tax and are not reported on Form W-2.

 

“Neither the amount the employee considers to be the value of the fringe benefit, nor the cost incurred to provide the benefit, determines its fair market value. The fair market value of a benefit is reduced by any amount paid by or for the employee.”

 

Mary Lou Sipple is a Payroll Consultant at NGA Human Resources, a leading provider of global HR services, technology and consulting.

She is a Certified Payroll Professional with more than 25 years of experience implementing human resource and payroll systems with multiple vendors across a wide range of industries. She has a BBA degree from Loyola University Chicago and an MBA from Dominican University.

 

By Mary Lou Sipple

A fringe benefit is a form of pay for the performance of services. An example of a fringe benefit is when an employee is allowed to use a business vehicle to commute to and from work.

A common question is: Are fringe benefits taxable? In general, any fringe benefit that is provided is taxable and must be included in the employee’s pay unless the law specifically excludes it.

Taxable means that the fringe benefit is included in the employee’s wages and reported on Form W-2. Federal income tax, social security tax and Medicare tax are withheld from the value of the benefit unless the employee has already reached the calendar year’s maximum social security limits.

Imputed income

Imputed income is the term the IRS applies to the value of any benefit or service that should be considered income for the purposes of calculating federal taxes. An imputed income benefit is the value of the non-monetary compensation given to an employee by an employer in the form of a benefit.

Fair market value

The general valuation rule is used to determine the value of most fringe benefits. Under this rule, the value of a fringe benefit is its fair market value. The fair market value (FMV) of a fringe benefit is the amount an employee would have to pay a third party in an arm’s length transaction to buy or lease the benefit.

Neither the amount the employee considers to be the value of the fringe benefit, nor the cost incurred to provide the benefit, determines its fair market value. The fair market value of a benefit is reduced by any amount paid by or for the employee. For example, if an employee has a taxable fringe benefit with a market value of $150 and the employee pays $50 for the benefit, the taxable fringe benefit is $100.

Generally, taxable fringe benefits are included in the employee’s wages in the year that the benefit is received. The value of taxable non-cash benefits can be treated as paid on a pay period, quarterly, semi-annually or annually, or on another basis, provided that the benefits are treated as paid no less frequently than annually.

The value of taxable noncash fringe benefits provided during the last two months of the calendar year, or any shorter period within the last two months, can be treated as paid in the next year.

This does not mean that all benefits treated as paid during the last two months of the calendar year can be deferred until the next year. Only the value of benefits actually provided during the last two months of the calendar year can be treated as paid in the next calendar year.

• Additional guidance on taxable fringe benefits can be found in the Employer’s Tax Guide for Fringe Benefits on the IRS website.

Non-taxable fringe benefits include the following:


• Accident and health benefits
• Achievement awards: Exempt up to $1,600 for qualified plan awards, $400 for non-qualified awards
• Adoption assistance
• Athletic facilities: Exempt if substantially all use during the calendar year is by employees, their spouses and their dependent children and if the facility is operated by the employer on premises owned or leased by the employer
• De Minimis (minimal) benefits: Examples include occasional personal use of a company copying machine, holiday gifts other than cash and occasional parties for employees and their guests 
• Dependent care assistance: Exempt up to $5,000 ($2,500 for married employee filing separate return) 
• Educational assistance: Exempt up to $5,250 of benefits each year 
• Employee discounts: An example is discounts for department store employees 
• Employee stock options 
• Employer-provided cell phones 
• Group-term Life insurance coverage: Exempt up to cost of $50,000 coverage 
• Health savings accounts (HSA’s) 
• Lodging on employer’s business premises 
• Meals 
• Moving expense reimbursements 
• No-additional-cost services: An example is free passes for airline employees 
• Retirement planning services 
• Transportation (commuting) benefits: Exempt up to $250 for qualified parking, $130 for rides in a commuter highway vehicle and/or transit passes, or $20 for qualified bicycle commuting 
• Working condition benefits: An example is business use of employer-provided automobile

Excluded benefits are not subject to federal income tax withholding and, in most cases, they are not subject to social security, Medicare, or federal unemployment (FUTA) tax and are not reported on Form W-2.

 

“Neither the amount the employee considers to be the value of the fringe benefit, nor the cost incurred to provide the benefit, determines its fair market value. The fair market value of a benefit is reduced by any amount paid by or for the employee.”

 

Mary Lou Sipple is a Payroll Consultant at NGA Human Resources, a leading provider of global HR services, technology and consulting.

She is a Certified Payroll Professional with more than 25 years of experience implementing human resource and payroll systems with multiple vendors across a wide range of industries. She has a BBA degree from Loyola University Chicago and an MBA from Dominican University.