Fringe benefits are a way to compensate your employees beyond their regular wages. These perks, like gym memberships and cell phone reimbursements, can help your business attract and retain talented employees by sweetening your overall compensation package.
Here are a few examples of fringe benefits in the wild:
- Stock options
- Health savings accounts (HSAs)
- Commuting assistance
- Cell phones
- Gym memberships
- Free snacks and meals
The IRS treats fringe benefits as a type of pay, and therefore considers them taxable (although there are a few exceptions, which we’ll get into later).
Now, let’s dig into what you need to know about fringe benefits as a business owner.
Do I have to offer fringe benefits to my team?
While some types of benefits are required, like workers’ compensation in some states, health insurance (if you have more than 50 full-time employees), and time off to vote, fringe benefits aren’t mandatory for employers.
So why would I want to offer fringe benefits?
Fringe benefits can help you hire and retain the employees your business needs. In a recent survey of job hunters, 25 percent of respondents said perks were very important. Only 10 percent said they weren’t important at all.
This is why more and more companies offer fringe benefits as part of their overall compensation package. In fact, a whopping 71.6 percent of companies in the US offer fringe benefits.
Plus, you may be able to recoup some of the money you spend by deducting certain benefits as a business cost. For the complete rules, check out IRS Publication 15-B.
Do I have to pay taxes on fringe benefits?
Most fringe benefits count as taxable income for employees. But the IRS makes exceptions for some types, which are outlined in the chart below.
Keep in mind that some non-taxable benefits may become taxable if you give them to shareholders or highly-compensated employees. Also, many benefits have an annual cap, meaning that any perks past that amount are considered taxable.
However, state and local taxes may treat fringe benefits differently. Check with an attorney before determining the taxable status of your fringe benefits.
Which fringe benefits are taxable?
Assume every fringe benefit is taxable unless exempted by the IRS. (Remember, state and local taxes might be different!)
Here are some examples of fringe benefits that are taxable:
- Company cars used for personal trips
- Moving expenses
- Personal use of a working condition benefit. For example, this could be a computer that’s used 50 percent for work and 50 percent for gaming.
Which fringe benefits are NOT taxable?
The IRS defines some benefits as non-taxable. This means that they’re exempt, or excused, from federal taxes (although not necessarily state or local taxes).
Below are the fringe benefits that the IRS says your employees may not need to pay taxes on, as of July 2019:
|Employee benefit||Tax rules for 2020|
|Accident and health benefits to help employees and their families||Non-taxable for most employees, excluding certain long-term care benefits, which are not exempt from income tax|
|Achievement awards for high-performing employees||Non-taxable for most employees up to $1,600, as long as the achievement is given under a “qualified plan,” which is an established program that isn’t designed for well-compensated employees. Otherwise, the exemption limit is $400.|
|Adoption assistance||Non-taxable for most employees for income taxes, but taxable under Social Security, Medicare, and unemployment taxes|
|Gym membership||Non-taxable if your company owns the gym (and owns or leases the property) and the only users are your employees and their immediate family members|
|De minimis (minor, non-cash) benefits, like inexpensive birthday or holiday gifts, occasional parties, or personal use of a printer||Non-taxable|
|Dependent care assistance||Non-taxable for most employees up to $5,000, or $2,500 for married employees who file separate tax returns|
|Educational assistance, like tuition reimbursements||Up to $5,250 each year is non-taxable|
|Employee discounts for your own goods or services||Exempt for most employees, as long as you aren’t discounting your services by more than 20 percent or your physical goods by more than the gross profit percentage (the net sales, minus the cost of the goods) of what you’d charge a customer|
|Employee stock options||Non-taxable in some cases, although there are some tricky rules surrounding stock options. Talk to an attorney about this one.|
|Employer-provided cell phones||Non-taxable, as long as they’re mostly used for business purposes|
|Group-term life insurance||Non-taxable for most employees for up to $50,000 of coverage|
|Health savings accounts (HSAs)||Non-taxable up to $3,550 for employee-only coverage and $7,100 for family coverage, as long as your employee has an eligible high-deductible health plan (HDHP)|
|Lodging on business premises, like a rented basement for an on-site nanny||Non-taxable for most employees, assuming your employees’ lodging is for your convenience and is a condition of employment|
|Meals||Non-taxable for most employees—but, like lodging, it must be for your convenience (like to encourage employees to get to know each other). De minimis meals, like the occasional party, are also exempt.|
|No-additional-cost perks, like providing free hotel rooms to employees if you run a hotel||Non-taxable for most employees|
|Transportation benefits, like transit passes or qualified parking||Up to $270 per month is non-taxable. This includes things like parking, commuter passes, or transit passes. De minimis transportation expenses, like driving an employee to a work event, are exempt as well.|
|Tuition reduction at your own educational institution||Non-taxable for most employees for undergraduate education and post-graduate education if the employee is a teacher or researcher|
|Working condition benefits, like a company computer||Non-taxable|
How do I report taxable fringe benefits?
The way you report taxable benefits may differ based on how your employee is classified.
- For full- and part-time employees, report taxable fringe benefits on their Form W-2
- For independent contractors, use their 1099-MISC to report taxable fringe benefits
- For partners, report taxable fringe benefits on their Schedule K-1
If an employee’s family member uses a fringe benefit, like a gym membership, the IRS still considers your employee the recipient of the benefit, so you should report the benefit on your employee’s tax forms.
You need to calculate the actual value, called the imputed income, of the tax benefit by January 31 of the following year. Generally, it’s easy to determine the value of fringe benefits—just ask yourself what your employee would have to pay to get the benefit. (This price is called the fair market value.)
When withholding fringe benefits from your employees’ pay, keep the following points in mind:
- You can withhold relevant taxes in each paycheck, quarterly, annually, or whatever system works best for your company. But it has to be at least annually
- You can either add the taxable value of the fringe benefits to your employees’ regular pay stubs and tax it accordingly or withhold a flat rate of 22 percent
But some employee benefits have complicated rules. That’s why it’s important to talk to an accountant before deciding which fringe benefits to offer. And make sure you’re properly reporting them for each employee so they’re taxed correctly.