The Tax Implications Of Employee Fringe Benefits
In employment and salary statistics, what people usually take into account is the gross amount of money a company pays its employees every payday. However, there are other fringe benefits that companies provide for their employees and these add to the value of what employees receive from their companies as payment. In some cases, however, these fringe benefits may be taxable as they constitute a higher real income. Read on to find out about the tax implications of employee fringe benefits.
Examples Of Common Fringe Benefits
Fringe benefits may come in various forms, some cash and some non-cash. Here are some examples:
- performance bonuses
- travel expenses
- meal plans
- vehicle allowances
- uniforms and equipment
- employer-provided vehicles
- fees for professional licenses and dues
- educational reimbursement
- group-term life insurance
- health and medical benefits
- employee awards
- employee discounts
- frequent flyer miles
These and other benefits may or may not be identified as fringe benefits by the IRS. However, even though they all add to the value of what an employee receives from an employer, they are not all taxable as income. Even when they are taxable, they may be taxed in different ways.
According to the IRS, when it comes to taxation, the fringe benefits that employees receive from their employers fall into four basic categories:
- Taxable – In this case, the employer is required by law to assess the dollar value of a particular benefit and report it as part of the employee’s income. For example, if the company gives an employee a gift card at the end of the year, the value of that gift card is usually taxable, even if the employee may only use it at a particular store.
- Excludable – In this case, the value of the benefit does not count as employee income. The employer may report it as a business expense, but it is not taxable to the employee at all.
- Partially Taxable – In some cases, an employee benefit may only be taxable to a certain point. For instance, the first $500 of value for a certain benefit may be excludable, but anything beyond that may be taxable.
- Tax-Deferred – In the case of tax-deferred benefits, employers do report the benefit to the IRS as employee income, but the employee does not have to pay taxes on it until later once certain conditions have been met.
Health And Medical Benefits
One of the most common ways in which employers provide benefits to their employees is through health and medical benefits. Employers commonly do this because by enrolling all of their employees in the same healthcare program, they minimize the cost per employee. One reason for this is because insurance companies offer more competitive rates when people enroll in groups. Also, instead of purchasing health and medical insurance for employees, some companies simply agree to pay for many employee medical expenses themselves. In either case, whatever employers spend on their employees in this way is usually exempt from taxation.
Commissions And Bonuses
For many jobs, especially sales jobs, employers agree to pay employees a set amount plus a commission or bonus based on performance. For instance, a sales representative could make $30,000 per year plus $1,000 for every sale. These types of benefits are almost always taxable as normal income and the IRS requires employees to report it as such.
Vehicles And Telephones
In many cases, employees must frequently use vehicles or telephones – especially cellular phones – to perform their basic job tasks. In these situations, employers may either purchase vehicles and phones for their employees or give them a regular allowance to accommodate for these expenses. While the IRS has taxed employer-provided cell phones in the past, at present, neither employer-provided vehicles nor employer-provided cell phones are counted as taxable income. When employers give reimbursements to their employees to pay for the use of their personal vehicles and telephones, these reimbursements are tax-exempt as long as the employee can verify that the reimbursements received did not exceed the cost of using these pieces of property for business purposes. The extent to which the reimbursement exceeds the actual cost is taxable as normal income.
Meals And Lodging
The value of meals and lodging that employers provide to their employees is excludable under certain conditions. First, the location of the meals and lodging must be the business premises. Second, these must come for the sake of the employer’s convenience. For instance, a company with a large corporate campus that is far from restaurants may provide free lunches to its employees in order to save time by keeping them from going elsewhere for food. Third, in the case of lodging, it must come as a requirement for employment. For example, if an employer buys a house and gives it to an employee, this will be taxed as income. However, if a miner must live in a mine dormitory, this will not be taxed as income.
Companies often require their employees to go on business trips. In these situations, the company usually pays for things like airplane tickets, hotel stays and meals. As long as such expenses are necessary for the purpose of carrying out a specific matter of business, they are excludable.
Group-Term Life Insurance
Just as employers often provide health and medical insurance for their employees, they often provide life insurance as well. Whatever employees spend on group-term life insurance for their employees, up to $50,000 worth of coverage, is excludable and does not count as employee income.
Reporting Fringe Benefits
When employees submit their tax returns, they often must report any fringe benefits received to the IRS. Sometimes, if they expect exclusions, such as in the case of vehicle allowances, they must provide evidence that the necessary conditions have been met. Make sure to keep close track of all of your fringe benefits throughout the year so you can enjoy all possible tax exclusions and avoid trouble with the IRS.
If you are the beneficiary of fringe benefits, it is important that you know which benefits are taxable and which are excludable. It could help to you avoid a run in with the IRS down the road.