By: Jessica A. Distel, CPA, MBA - Managing Director of Business Services and Development
Small business owners and employees often wonder about the federal tax treatment for employer-provided fringe benefits. Are they taxable? Do they have to be added to payroll or the employee’s Form W-2? It depends on the nature of the fringe benefit and if the benefit is defined as having a tax-favored status within the Internal Revenue Code. The Internal Revenue Service has identified several categories of employer-provided fringe benefits that generally do not have to be included in gross wages. These categories are defined by U.S. Code § 132 as follows:
- No-Additional-Cost Services: any service provided by an employer for an employee's use that is offered for sale to customers in the ordinary course of the employer's line of business in which the employee is performing services, and the employer incurs no substantial additional cost in providing the service to the employee. For example, the practice of an airline allowing its personnel free flights to the extent that there is empty space on a flight.
- Qualified Employee Discounts: any employer-provided employee discount with respect to qualified property or services to the extent that the discount does not exceed: (1) in the case of property, the gross profit percentage of the price at which the employer offers the property to customers; or (2) in the case of services, 20% of the price at which the employer offers the services to customers.
- Working Condition Fringes: any property or services provided by an employer to an employee to the extent that, if the employee paid for the property or services personally, the payment would be deductible as an ordinary and necessary trade-or-business expense or as depreciation.
- De Minimis Fringes: a de minimis fringe is any property or service, the value of which is so small as to make accounting for it unreasonable, or impractical.
- Qualified Transportation Fringes: a qualified transportation fringe is transportation in a commuter highway vehicle if the transportation is in connection with travel between the employee's residence and place of business, a transit pass, qualified parking, or a qualified bicycle commuting reimbursement. Cash reimbursements made by the employer for such expenses under a bona fide reimbursement arrangement also may qualify for the exclusion. Note, however, that qualified bicycle commuting reimbursements must be included in income for tax years 2018 through 2025.
Each year, the dollar amounts excluded from gross income (except those for bicycle commuting) are subject to adjustment for inflation. The exclusion does not apply to any qualified transportation fringe unless such benefit is provided in addition to (and not in lieu of) any compensation otherwise payable to the employee. Exclusion from gross income is not available to self-employed individuals.
- Qualified Moving Expense Reimbursements: is any amount an individual receives directly or indirectly from an employer as a payment for, or reimbursement of, moving expenses which would be deductible as an employee moving expense if the individual paid or incurred the expenses directly. The amount does not include any payment or reimbursement which the employee deducted in a prior taxable year. Note, however, that qualified moving expense reimbursements are not excluded from income for tax years 2018 through 2025, except in the case of certain military relocation expenses.
- Tuition Reductions: qualified tuition reductions are excludible from gross income and include the amount of any reduction in tuition that is provided to an employee of an educational institution for pre-graduate level education at that institution or at any other educational institution. The reduction also can be provided to the broader range of individuals treated as employees for purposes of the no-additional-cost fringe benefit rules, including retirees, widows, widowers, spouses and dependents. The tuition reduction plan must meet nondiscrimination standards, and the reduction must be available on substantially the same terms to each member of a group of employees defined under a reasonable classification set up by the employer and that does not discriminate in favor of highly compensated employees.
- Qualified Retirement Planning Services: constitute retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer plan.
Employer-provided fringe benefits and their treatment for income tax purposes can be complicated. As some areas may seem gray, the unique facts and circumstances related to the benefits may ultimately determine if they are to be included in gross wages or not. As always, if you have questions, please reach out to one of our team members in the Tax & Business Services Department at Buckingham Advisors.