Fringe benefits is the umbrella term for any benefits, from health insurance to paying for weekly team lunches, that an employer provides to an employee, contractor, board member, or business partner. Many fringe benefits are considered tax-free by the IRS and can be a great value-add for your employees.
In this article, we will explain:
- What Fringe Benefits Are & Which Ones Are Tax Free
- Are You Already Offering Fringe Benefits?
- How Do I Figure Out If they Need to Be Taxed?
What Fringe Benefits Are & Which Ones Are Tax Free
Fringe benefits is the umbrella term for all employee benefits, including “normal” benefits like health insurance.
You can also look at fringe benefit as a form of pay other than money for the performance of services by your employees. For example, group term life insurance is a fringe benefit, and so are company-sponsored meals during business travel. Fringe benefits cover a wide array of things and some are tax free, and other are considered taxable by the IRS.
The long list of fringe benefits that are tax-free includes:
- Medical insurance
- Disability insurance
- Health Savings Accounts (HSA)
- Dependent care assistance (DCAP- usually offered as an FSA)
- Education tuition assistance
- Group term life insurance (up to $50,000 payout coverage)
- Qualified employee benefits plans, like profit-sharing or stock options
- Achievement awards up to $1,600
- Commuter benefits
- Employee discounts on your own products
- De minimis fringe benefits such as birthday or holiday gifts, event tickets, traditional awards (such as a retirement gift), and coffee and soft drinks (both on-site and off-site, including business trips and company functions). De minimis means, unofficially, around $75/benefit given. We recommend consulting your accountant if you provide this type of benefit consistently to employees to determine if you, or they, need to be reporting them.
- Cafeteria plans
However, there are also many “typical” fringe benefits that are considered taxable. Taxable fringe benefits must be included as income on the employee’s W-2 and are subject to withholding.
Typical examples of taxable fringe benefits include mileage reimbursement over the IRS standard, company cars that are also used for personal driving, and company equipment (like a laptop) that is also used for personal uses. There is a full guide from the IRS here on fringe benefits and which ones are excluded versus taxable.
Are You Already Offering Fringe Benefits?
As you read this, you may now be realizing that you do offer fringe benefits already. Maybe the soda machine in the break room is free of charge, maybe you treat everyone to lunch once a month, or maybe your business even lets employees use their laptops for personal use. All of these things are considered fringe benefits.
If you aren’t offering fringe benefits, you might want to consider setting aside a monthly budget for them of a few hundred dollars. Doing so can actually help your bottom line. We have some fringe benefit ideas in our employee recognition article; some other ideas include:
- A fancy office coffeemaker that makes lattes and espresso (so people don’t have to run out)
- A weekly lunch & learn where the company provides a simple lunch and a group or team from the company presents on a topic- you get both training and a benefit in one!
- A monthly contest where someone can win a gift card for their company efforts
The catch is, some of these items might be taxable. To ensure you stay compliant with the IRS, you may need to include some fringe benefit items on employee’s W2s. Or, if you’re worried about company-provided equipment like laptops and cell phones being used for personal-use, change your employee handbook to specify that equipment is for business use only.
How Do I Figure Out If They Need to be Taxed?
Our best advice is to write down everything in your office that could be similar to a fringe benefit and to document how much it costs, how often you provide it, and the like. Then, once you have this list, you can ask your accountant or check the IRS guide to make sure that nothing you provide needs to be included on an employee’s W-2 at the end of the year.
Also, independent contractors are subject to these rules as well, not just your employees. If you provide fringe benefits for your contractors, you’ll want to document those as well.
Let’s break it down into 3 categories to continue to find clarity on fringe benefits:
- Things that always tax free
- Things that are sometimes taxed and sometimes tax free
- Things that are never tax free
The full guide to these categories can be found from the IRS.
Category 1: Things that are always tax free
Tax qualified fringe benefits are totally free of federal and state income tax, and Social Security and Medicare taxes. They include benefits like:
- health insurance
- medical expense reimbursements
- dental & vision insurance
- employee stock options
- moving expense reimbursements
- meals provided for the business’s convenience (i.e. such as how Google offers breakfast, lunch, and dinner because it hopes the employees will be working that long on company business)
- meals that are de minimis (under $75/employee)
- adoption assistance
- free services provided to employees
- any benefits that are less than $75/year (i.e. coffee)
- lodging for business purposes (i.e. like a jockey living at a horse race stable)
Category 2: Things that are sometimes taxed and sometimes tax free
Some fringe benefits have limits attached to them, and are tax free up to a certain amount, but then can be taxed when over that amount. Those include:
- group term life insurance (up to $50,000 covered)
- education assistance (up to $5,250 per employee)
- business-provided meals that are over $75/person
- day care/dependent assistance (up to $5,000)
- transportation allowances (up to the current limits, $20 for bikes, $255 for most other passes/public transit/vanpooling/car parking)
- employee discounts on a company’s service or products (up to 20% off)
- achievement awards (up to $1,600)
- retirement plan contributions (up to the limits)
- If an employer pays disability insurance premiums for an employee (and the employee is the beneficiary), the premiums are excluded from the employee’s income. However, the employee must pay income tax on any disability benefits received under the policy. One exception: Disability payments for the loss of a bodily function or limb are tax free.
Category 3: Things that are never tax free
If your business offers large ticket items like cell phones, laptops, or cars for employees to use both for business and personal reasons (but that the company purchased), you will want to check with your accountant on if they should be reported on the employees’ W-2 forms.
The Bottom Line
Your small business is likely already offering fringe benefits. Document them, check them out with your accountant, and don’t forget to include them as part of your recruitment process so that candidates can see how valuable working for your company really is.