Are Your Fringe Benefits Tax-Deductible?

What are fringe benefits?

The best tactic for employers to retain talent and help their employees enjoy a better quality of life is by giving employees a number of perks and benefits. Fringe benefits are a type of compensation that supplement a worker’s salary and wage, such as health insurance. Ideally, companies want to reduce the turnover rate and improve work performance by investing into their employee's skills, health and overall growth.

Large tech companies such as Google and Apple understand the importance of giving back to their employees, whether it’s having cafeterias serve gourmet meals, or subsidizing employee gym memberships. However, come tax season, it may be confusing to discern which benefits are taxable or not. Both employers and employees should be aware that they are required to file tax claims based on the fair market value of these benefits. Fair market value is the amount one would pay if the service or good was purchased through a third party. To keep a clear account of which fringe benefits fall under taxable and non-taxable categories, here is a list of items to keep in mind:

Tax Deductible Benefits

1. Health insurance
2. Group-term life insurance
3. Employee stock options
4. Health savings account
5. Employee discounts
6. Lodging
7. Retirement planning services
8. Low-value gifts or perks such as gift cards and movie tickets
9. Company-provided meals
10. Achievement awards
11. Company cell phones
12. No-additional-cost services
13. Tuition reimbursement (up to a limit)
14. Transportation and commuting passes
15. Accident insurance
16. Adoption assistance services
17. Athletic facilities on company property
18. Dependant care assistance (up to certain limits)
19. De minimis benefits

With exception to specific circumstances, these benefits are tax-deductible for employees and employers. Certain categories such as dependant care assistance and tuition reimbursement have limits as tax-free deductibles. For example, tuition reimbursement is a tax-free deductible if the amount is under $5,250 a year. De minimis benefits, which are services and goods of little value, include items such as free coffee and donuts, small birthday gifts, movie tickets, and refreshments, and are all tax-free deductibles.

Other categories, such as athletic facilities, are non-taxable under certain circumstances. For example, in order for an athletic facility to be a non-taxable fringe benefit, the employer must own or lease the land the facility sits on. For meals to be non-taxable, the company or employer must pay for the meal and it must be eaten on company property.

Taxable fringe benefits

Taxable fringe benefits would include services and goods that exceed deductible limitations set by the IRS and are subject to federal income tax, Social Security tax, Medicare, and Federal Unemployment tax. Taxable fringe benefits include:

1. Tuition reimbursements exceeding $5,250 a year
2. Moving expenses for employees moving less than 50 miles away
3. Large gifts that exceed IRS limits (gifts above $75)
4. Cash bonuses
5. Achievement awards exceeding $1600 per year
6. Gift cards that are exceed de minimis limits
7. Gym memberships
8. Country club dues
9. Using a company car for personal use
10. Large raffle prizes

Many items that fall under taxable fringe benefits exceed IRS deductible limitations or are items that are not necessarily related to business matters. For example, if an employee drives a company car to a business meeting in a different city, the mileage reimbursement (if under the deductible limit) is non-taxable. However, if an employee drives the company car to a personal appointment, then the mileage reimbursement is taxable. Other miscellaneous items such as winning a holiday raffle at work can be taxable if the item is an expensive gift, such as an iphone. In any case, report each benefit to your accountant in order to properly determine which item is taxable and non-taxable.

Filing Taxes

Whether you’re an employee receiving fringe benefits or an employer giving your workers fringe benefits, it is important to keep an accurate report of which benefits are taxable and which are deductible. Taxable fringe benefits must be reported when filing taxes. Employers must be careful to include taxable fringe benefits when filing or it could cause issues with the IRS.

Employers will need to determine which benefits need to be reported in taxable income and how much tax to withhold. They must also inform employees of these values through their W-2 statements or through a form for reporting benefits. On the other hand, employees must be careful not to under report these values when filing their tax returns and may otherwise face penalties from the IRS. Work with your accountant to make sure every benefit, perk, and gift is accounted for correctly.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.