Common fringe benefits provide employees total compensation above and beyond their typical wages or salaries. A wide range of fringe benefits is offered by employers. Health insurance premiums, child care, transportation vouchers, and retirement-account matching contributions are among the most common fringe benefits.
To take advantage of an employer’s fringe benefits in the most effective way, employees need to understand how common fringe benefits are considered for taxation purposes.
- Fringe benefits (e.g., life insurance, tuition assistance, and employee discounts) are perks and additions to normal compensation that companies give their employees.
- If a fringe benefit is transferred as cash, such as a bonus or reimbursement for expenses, they are likely to be subject to income tax.
- Benefits received in-kind, or considered de minimis, are usually not subject to taxation.
- Employers often provide other employee benefits such as health plans, unemployment insurance, and worker's compensation.
- Taxable fringe benefits are included on an employee's W-2.
What Are Some Taxable Fringe Benefits?
Any fringe benefit offered as a bonus to an employee from an employer is considered taxable income unless it falls under a specific list of excluded benefits as determined by the IRS. Taxable fringe benefits must be included on an employee’s W-2 each year, and the fair market value of the bonus is subject to withholding.
The most common fringe benefits considered a taxable part of total compensation include reimbursement for mileage expenses that exceed the limitations provided by IRS guidelines and reimbursement of education or tuition expenses that are not directly related to job performance or are more than the stated IRS limits. In addition, a bonus that falls under the category of working conditions benefit, such as a mobile phone or company car, can be considered taxable if used outside of business.
For taxpayers claiming a mileage deduction, the 2022 IRS standard mileage rate for business use is 58.5 cents per mile. Any amount exceeding this limit is considered taxable as income. For example, if a company reimburses its employee 65 cents per mile, then 6.5 cents per mile is taxable.
Except for certain active-duty military personnel, the Tax Cuts and Jobs Act eliminated the moving expenses exclusion for taxpayers from 2017 to 2026.
Annually, employers can exclude up to $5,250 from an employee's wages for education-related assistance provided that assistance was provided under a qualifying program. Amounts exceeding this threshold are taxable as ordinary income.
Which Fringe Benefits Are Excluded From Taxation?
Although some fringe benefits are considered a part of taxable income for employees, there is a lengthy list of common fringe benefits that are excluded from an employee’s taxable compensation. For example, awards given for achievements are exempt from tax withholding, as well are accommodations provided so an employee can perform their job.
Fringe benefits that fall under the definition of de minimis benefits are not taken into consideration when determining taxable income. De minimis benefits are those that hold such a minimal amount of value that employers would have a difficult time accounting for them. For instance, a gift card given to an employee for a holiday or birthday is considered a de minimis benefit, as are refreshments or snacks provided during a business meeting.
Typically, meals are not considered a taxable fringe benefit for employees, although certain qualifications must be met. Employers buying lunch or dinner for employees must provide the meal on business grounds, and it must be offered as a benefit of the employee. This means a meal could be a tax-free benefit to employees when offered during a lengthy meeting or during required overtime.
Other fringe benefits that are not considered taxable to employees include health insurance (up to a maximum dollar amount), dependent care, retirement planning services, adoption assistance, group term-life insurance, qualified benefits plans such as profit sharing or stock bonus plans, commuting or transportation benefits, employee discounts, and working condition benefits only used for business purposes.
Other important benefits offered to U.S. employees are unemployment insurance, governed by individual states, and worker's compensation.
Unemployment insurance temporarily provides unemployment benefits to certain workers who have lost their jobs. To qualify, the worker must not have caused the loss of employment, must have worked for a specific period and earned a certain amount as determined by their state of residence, and be actively looking for employment.
Worker's compensation, organized under the Department of Labor's Office of Worker's Compensation Programs (OWCP), provides compensation to federal workers who are injured at work or acquire a disease from work. The injured are either compensated with money, medical treatment, vocational rehabilitation, or other benefits.
In addition to these government-sponsored programs, some employers offer health plans—one of the most desired benefits—to their employees. Companies that fund their employees' health insurance plans will not have social security, Medicare, FUTA, and federal income taxes withheld.
How Much Are Fringe Benefits Taxed?
Fringe benefits may be taxed at the employee's income tax rate, or the employer may elect to withhold a flat supplemental wage rate of 22% on the benefit's value. If the value of benefits exceeds $1 million in a year, the supplemental wage rate is 37%.
What Fringe Benefits Are Excluded From Taxes?
The IRS allows several fringe benefits to be excluded from taxes. Some of these benefits include adoption expenses, group-term life insurance, retirement planning services, and de minimis benefits (e.g., certain meals and employee parties).
Are Fringe Benefits Included in Gross Income?
Most fringe benefits, except those excluded by the IRS, are included in an employee's gross income.
Are Taxable Fringe Benefits Included on a W-2?
Taxable fringe benefits are reported on an employee's W-2.
The Bottom Line
Employers offer a wide range of fringe benefits as a recruitment or retention strategy, and these benefits can make up a substantial portion of an employee’s total compensation. To fully compare benefits packages between employers, it is important to understand how common fringe benefits are taxed.