How Are an Employee's Fringe Benefits Taxed?

Common fringe benefits provide employees total compensation above and beyond their typical wages or salaries. A wide range of fringe benefits are offered from 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, it is important for employees to understand how common fringe benefits are considered for taxation purposes.

Key Takeaways

  • Fringe benefits are perks and additions to normal compensation that companies give their employees, such as life insurance, tuition assistance, or employee discounts.
  • If a fringe benefit is transferred as cash, such as a bonus or reimbursement for travel or other expenses, they are likely to be subject to income tax.
  • Benefits received in-kind, or considered de minimis are usually not subject to taxation.

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, relocation expenses for an employee who moves for employment that is less than 50 miles away, and reimbursement of education or tuition expenses that are not directly related to job performance or are in excess of the stated IRS limits. In addition, a bonus that falls under the category of a working conditions benefit, such as a mobile phone or company car, can be considered taxable if used outside of business.

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. First, 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, 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.

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, however, it is important to understand how common fringe benefits are taxed.