To hire and retain the best talent, many employers in the public and private sectors supplement their employee compensation packages with attractive perks that go above and beyond salary.
Noncash job perks such as insurance plans, education assistance, retirement plans, or amenities like a cafeteria or a fitness center won’t increase an employee’s bank account balance in the short term. Still, they can provide savings over time and contribute to a positive overall work environment.
Likewise, for the employer, employee retention and satisfaction can add value to the company and drive down costs over time — a true win-win proposition.
However, although most fringe benefits are not monetary in nature, the IRS still considers many of them to be taxable income for the employee. To avoid unnecessary surprises at tax time, both employers and employees must understand the ins and outs of fringe benefit taxation.
Keep reading to learn more about the taxation of fringe benefits, what benefits qualify for tax exclusions or deferrals, and how to value fringe benefits.
The term “fringe benefit” refers to any benefit provided to an employee that is in addition to the employee’s standard rate of pay. They can take the form of property, services, cash equivalents (such as savings bonds), or even cash in some cases (like bonuses which the employee takes as cash).
When employees choose between job offers, financial compensation is just one of numerous factors they consider. Most employers offer competitive wages and salaries, so a good benefits package is often essential to standing out from the crowd.
Some examples of commonly offered fringe benefits include:
Employers may deduct some types of fringe benefits (for instance, health insurance or retirement plan contributions) from an employee’s gross salary, while employers may offer others (such as on-premise facilities) for free or at a discount.
Additionally, certain fringe benefits are required by law for companies of a specific size with a certain number of full-time employees. Exactly which benefits are legally required and for which companies can vary based on local and state laws, so it’s best to consult professionals (like us!) for the most accurate information. However, some common examples include:
Generally, fringe benefits are included in an employee’s gross income, with some exceptions. That means that the IRS considers them to be income, so unless the law expressly excludes it, all benefits you provide are subject to employment taxes.
The fair market value of each benefit added on top of the employee’s gross income and reported on a W2 form is also subject to income tax withholding unless the IRS excludes it (we’ll discuss exclusions in the next section).
One of the most common types of fringe benefit that the IRS considers taxable is employee reimbursement (such as for mileage expenses over a set limit, for education or tuition expenses not directly related to job performance, or over a set limit). Additionally, the IRS considers a working conditions benefit, like an employer-provided phone or automobile, taxable if used outside of business.
Other examples of taxable fringe benefits include:
As mentioned above, there are some specific tax exclusions and deferrals for benefits provided to an employee. The IRS deems some fringe benefits nontaxable because they are deductible on a pre-tax basis.
For example, an employer contribution to a qualified retirement on behalf of the employee is eligible for tax-deferral, which means the contribution is not subject to taxation until the employee chooses to withdraw from the plan.
Additionally, employer-provided health insurance for an employee is a tax-free fringe benefit, and awards for achievements are also exempt from withholding. Meals are also exempt, as long as they are provided on business grounds and offered as a benefit. For example, a meal during required overtime qualifies as a tax-free benefit.
According to the de minimis tax rule, the IRS does not consider taxable fringe benefits that hold such a small value as challenging to account for, such as a gift card or snacks provided during a meeting.
Other tax-exempt benefits include health insurance (up to a set threshold), dependent care, retirement planning services, adoption assistance, group term-life insurance, qualified benefits plans, transportation benefits, and employee discounts.
Some of these exclusions can present an opportunity: a small business owner in a corporate setting may be both the owner and an employee of their business. By taking advantage of excludable fringe benefits, the owner receives a double benefit. First, the cost of the benefit is deductible by the business. Second, the cost of the benefit is tax-free to the employee-owner.
In general, you can determine the value of a fringe benefit by its fair market value. That means the employer must include the amount by which the fair market value of a given benefit is greater than the sum of what the employee paid for it (plus any amount that the law excludes).
In simpler terms, the amount the employee likely would have had to spend to purchase a product of equal value to the benefit in a typical transaction is probably much greater than whatever amount they paid under your benefits program. The difference between those amounts, or the amount by which the fair market value exceeds the cost to the employee, is part of the employee’s annual taxable income.
To estimate the fair market value of an item, an excellent place to start is to compare it to the retail cost of an equivalent or comparable item. For example, if your benefits package includes membership at a local resort, the resort’s regular price for membership is a good measurement of the fair market value of that benefit.
There are other special rules that employers and employees may use to value certain fringe benefits. Take a look at IRS Publication 15-B, Employers’ Tax Guide to Fringe Benefits, for more information.
Talented professionals want more than a competitive salary; they want competitive fringe benefits, too. That’s why it is in an employer’s best interest to attract and retain top talent by including attractive benefits in their compensation package.
However, it is equally important for both employer and employee to understand what fringe benefits are fully and how they are taxed.
If you are confused about the tax treatment of employee fringe benefits, it’s a good idea to speak with a tax professional. At Rosenberg & Chesnov, we stand ready to assist you with any questions.
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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.
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