The Skinny on Fringe Benefits and Taxes
Summary: It can be a forgotten aspect of taxation, but with few exceptions, fringe benefits must be included in an employee’s gross income and are subject to tax withholding and employment taxes. Click through to make sure you’re in compliance.
Do you offer a variety of fringe benefits to your employees? According to the IRS, these may include cars and flights on aircraft that the employer provides, free or discounted commercial flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events.
Simply put, according to the IRS, “a fringe benefit is a form of pay for the performance of services.” For example, you are providing an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work.
In general, says the IRS, “the amount the employer must include is the amount by which the fair market value of the benefits is more than the sum of what the employee paid for it plus any amount that the law excludes.” In addition, there are other special rules that employers and employees may use to value certain fringe benefits.
You can’t automatically outsource the responsibilities. The IRS stresses that the business is the provider of a fringe benefit if it is provided for services performed for the company. This is true even if a third party, such as a client or customer, provides the benefit to your employee for services the employee performs for you.
Special rules for insurance
However, the IRS emphasizes, if you pay the cost of an accident or health insurance plan for your employees (including spouses and dependents), then the employer’s payments are not wages and are not subject to Social Security, Medicare and Federal Unemployment Tax Act taxes or federal income tax withholding. Generally, this exclusion also applies to qualified long-term care insurance contracts.
The IRS does draw a line between owners and employees. It explains that the cost of health insurance benefits must be included in the wages of S corporation employees who own more than 2% of the business.
Here are a few other exceptions to withholding rules. This list is not complete and may change, and other provisions may apply. Your best bet is to work with a tax professional.
Athletic facilities: Exempt if substantially used during the calendar year by employees, their spouses and their dependent children and the facility is owned and operated by the employer on premises or leased by the employer.
Employer-provided cellphones: Exempt if provided primarily for noncompensatory business purposes.
Meals: Exempt if furnished on premises at the business or if de minimis.
Dependent care assistance: Exempt up to $5,000 ($2,500 for a married employee filing separately).
Work with your tax adviser to make sure you’re handling your fringe benefits correctly.