Key Takeaways
Most employee fringe benefits are taxable unless the IRS specifically excludes them.
Certain benefits have annual tax-free limits, and amounts above those limits are taxable.
Proper classification and reporting can help small businesses avoid penalties and surprises at tax time.
What is a Fringe Benefit?
A fringe benefit is a form of compensation employers provide to employees in addition to their regular wages. These benefits can include property, cash, cash equivalents, discounts, savings accounts, and even non-cash perks such as experiences. For example, providing a company vehicle for an employee to use for commuting to and from work is considered a fringe benefit.
In most cases, fringe benefits are taxable to the employee. They must be reported as supplemental income on the employee’s W-2 and are subject to withholding and employment taxes. The IRS provides guidance on these benefits in its publication 15-B, Employer’s Tax Guide to Fringe Benefits.
Common Taxable Employee Benefits
Many small business owners are surprised to learn how many commonly offered perks are taxable. Below are some of the most frequently taxed employee benefits:
- Paid Time Off (PTO) – Paid time off, including vacation, sick leave, and personal days, is treated as regular wages. When PTO is paid out, it is fully taxable and subject to payroll taxes.
- Bonuses & Awards – Cash bonuses, as well as non-cash awards (cars, trips, etc.), are fully taxable. This includes gift cards and gift certificates.
- Gym Memberships -Any employer-paid health club or gym membership must be included in the employee’s supplemental income. The only exception is employer-owned gyms on the premises that are used exclusively by employees.
- Moving Expenses – If you reimburse your employee for moving expenses or provide a direct payment to help them relocate, it’s considered taxable income. Active-duty military personnel are exempt if relocating due to a change in duty station.
- Daycare Assistance – Any amount over the IRS $5,000 annual limit is taxable.
- Educational Assistance – Generally, any amount over the $5,250 IRS annual limit is taxable, unless it’s required to maintain or improve skills needed for the employee’s current position.
- Group-Term Life Insurance – The first $50,000 of group-term life insurance is tax-free. Any cost for additional coverage above that amount is taxable.
- Personal Use of Company Property – Although the use of company property (such as a computer, car, or plane) for business use is non-taxable to the employee, personal use of employer-provided property is taxable.
De Minimis Benefits – Not Taxable
Not all perks qualify as taxable employee benefits. Certain smaller items are deemed de minimis benefits and are tax-free. These are typically given infrequently and are of minimal value. Here are a few examples:
- Company Swag – If you are passing out bags, pens, or shirts (with the company logo) to mark an employee’s anniversary or other milestone, these gifts are typically not taxable to the employee.
- Non-Cash Holiday Gifts – Small, non-cash items (under $100 in value) should not be included in an employee’s income.
- Coffee & Snacks – Daily coffee and small snacks provided in an employee breakroom or lounge are not considered taxable fringe benefits.
- Company Events – Occasional events, such as a holiday party or company picnic, are also typically non-taxable to employees.
Although tax laws around employer deductions may change, these benefits are typically not taxable to employees.
Tax Tip For Small Business Owners
IRS rules surrounding taxable employee benefits include gray areas that can easily lead to compliance mistakes. Misreporting benefits can result in back taxes, penalties, and interest. To ensure benefits are properly classified, valued, and reported, small business owners should consult with a qualified tax professional before offering or changing employee benefit programs.