Fringe Benefits

Loading the player...

What are 'Fringe Benefits'

Fringe benefits are benefits provided by an employer to an employee, independent contractor or partner, some of which are tax-exempt when certain conditions are met. Recipients of taxable fringe benefits have to include the fair market value of the benefit in their taxable income for the year.

BREAKING DOWN 'Fringe Benefits'

Fringe benefits commonly include health insurance, group-term life insurance coverage, educational assistance, childcare and assistance reimbursement, cafeteria plans, employee discounts, employee stock options, personal use of a company-owned vehicle and others. Whether a fringe benefit is tax-exempt depends on the type and, in some cases, the value of the benefit. By default, all fringe benefits are taxable unless they are specifically named as being tax-exempt.

Tax-Exempt Benefits

Benefits that are exempt from income tax include the following:

  • accident and health benefits
  • achievement awards
  • adoption assistance
  • athletic facilities
  • de minimis benefits
  • dependent care assistance
  • educational assistance
  • employee discounts
  • employee stock options
  • employer-provided cell phones
  • group-term life insurance coverage
  • health savings accounts (HSA)
  • lodging on business premises
  • meals
  • moving expense reimbursements
  • no-additional-cost services
  • retirement planning services
  • commuting benefits
  • tuition reduction 
  • working conditions benefits

All of these exemptions are subject to certain conditions. For example, achievement awards are only exempt up to a value of $1,600 for qualified plan awards and a value of $400 for non-qualified plan awards. For moving expenses, the new job location must be at least 50 miles farther away from the employee's old home than the old job location. Some exemptions are not available to highly compensated employees if the benefits favor them over other employees; these include employee discounts, adoption assistance and dependent care assistance.

Most fringe benefits that are income tax-exempt are also exempt from Social Security, Medicare and Federal Unemployment taxes, but not all: adoption assistance is exempt from income tax only, for example. 

Any fringe benefit not named above, or any of the benefits named above which does not conform to the IRS's rules for exemption, is taxable. Working condition benefits are taxable to the extent that they are for personal use. For example, if an employee receives a company computer, their taxable income would include the computer's fair market value multiplied by the proportion of time they devote to personal use. If they only use it for business purposes, there's no additional taxable income. If 80% of their use is personal, their taxable income must include 80% of the value of the computer.

Valuing Fringe Benefits

In general, fringe benefits are valued at fair market value. This is the amount the employee would pay for the same benefit in a third-party, arms-length transaction. All relevant circumstances, such as geographic area and current market conditions, must be taken into account. The fair market value may be different from the actual cost to the employer of providing the benefit; this fact does not affect the valuation. 

Valuing the use of a company vehicle is more complicated. Using the fair market value is one option. If the car could have been leased on a cents-per-mile basis, the miles driven can be multiplied by an IRS-determined standard cents-per-mile rate (56 in 2014). If the employer sponsors a ride-sharing program, three or more employees regularly commute to work in a company vehicle, and the employees are not allowed to use the vehicle for personal reasons, the employer can use a rate of $1.50 per employee per commute. Under certain circumstances, the employer can use a daily or prorated annual lease value determined by the IRS. 

RELATED TERMS
  1. Line Of Business Limitations

    A federal income tax rule applied to fringe benefits that employers ...
  2. Accident And Health Benefits

    Fringe benefits provided to employees for sickness, accidental ...
  3. IRS Publication 525 - Taxable And ...

    A document published by the Internal Revenue Service (IRS) detailing ...
  4. Unit Benefit Plan

    An employer-sponsored pension plan that provides retirement benefits ...
  5. Employer-Sponsored Plan

    A type of benefit plan that an employer offers for the benefit ...
  6. Dependent Care Benefits

    Benefits provided by an employer to an employee for use in caring ...
Related Articles
  1. Professionals

    What are Fringe Benefits?

    Fringe benefits are non-monetary compensation employers give to employees. They are often associated with high priced perks given to top executives, but any employee can receive them. Fringe ...
  2. Taxes

    10 Sources Of Nontaxable Income

    Taxes are often a deterrent from investing and saving. These financial practices will bring you no tax grief.
  3. Retirement

    This Is Why Your Employer Should Offer a 401(k)

    Understand the unique benefits that come with a small business offering a retirement savings plan such as a 401(k) to current and future employees.
  4. Retirement

    5 Lesser-Known Retirement And Benefit Plans

    These plans aren't widely used, but they fill a specific niche for employees in certain situations.
  5. Retirement

    How Social Security Benefits Are Estimated & Taxed

    The Social Security check you'll get depends on your work history, when you start claiming a benefit and these other factors.
  6. Professionals

    6 Benefits You're Required by Law to Offer Your Employees

    Learn about the benefits that a business must offer to employees, such as family and medical leave, as well as various forms of insurance coverage.
  7. Financial Advisors

    How to Help Clients Navigate Open Enrollment

    With companies trying to pass on more costs to employees, making the right choices during open enrollment is more important than ever.
  8. Wealth Management

    How Linked Benefit Insurance Policies Work

    Linked benefit policies can be a viable alternative to traditional long-term care insurance. Here's how they work.
  9. Your Clients

    A Guide to Social Security Dependent Benefits

    Advisors and their clients tend to focus on Social Security retirement benefits. Social Security also offers dependent benefits. Here's how they work.
  10. Taxes

    5 Surprise Costs That May Affect Your Tax Bracket

    Surprise! You may owe more than you think.
RELATED FAQS
  1. How do fringe benefits help increase employee retention?

    Offering fringe benefits can be a valuable retention tool for employers wanting to maintain a high-quality, highly productive ... Read Answer >>
  2. What types of regulations are in place regarding fringe benefits?

    Read about the types of regulations that impact employee fringe benefits in the United States, including benefits mandated ... Read Answer >>
  3. Are Cafeteria plans taxable?

    Find out which benefits offered through your employer-sponsored cafeteria plan are taxable, and which qualified benefits ... Read Answer >>
  4. Are Social Security benefits taxable?

    Find out what rules and guidelines govern if your social security benefits are taxable. Learn how to determine if you are ... Read Answer >>
  5. Are Social Security benefits taxable after age 62?

    Learn under what circumstances Social Security benefits may be taxed for seniors age 62 and over, and find out which states ... Read Answer >>
  6. What assets are taxable and what assets are not taxable?

    Adjust your taxable income by understanding what assets the IRS taxes. Learn about legal strategies to lower tax liability ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center