Offering non-taxable fringe benefits as part of a compensation package can be a great way to recruit and retain talented employees. However, your organization needs to understand which benefits can and can’t be taxed, as these impact how much you pay to the IRS.
To help you make sense of it all, we’ve put together a quick guide on which benefits fall below the tax radar. This way, you can step forward with confidence when developing competitive pay packages for your organization.
If your company doesn’t offer competitive salaries, benefits, incentives, and perks, it may well find it challenging to attract quality people to the team.
Benefits refer to monetary and non-monetary gains the company passes on to its employees. As value-adding rewards, they are important for incentivizing your workforce. When employees are motivated, this tends to show up in their actions and, in turn, improves their performance.
There’s also the loyalty factor to consider. If your packages offer extras that employees appreciate, this is bound to increase their allegiance to the organization. When loyalty increases, workers are easier to retain. It’s precisely the reason why compensation and benefits are key factors in leading a workforce.
In short, providing benefits is a great way to bring out the best in your employees. Staying on top of accounting and tax reporting is the next step.
Fringe benefits are extra perks awarded alongside an employee’s usual pay. You can give these benefits to everyone in the organization or direct them to a specific group based on performance or seniority.
As the employer, you are in charge of reporting and taxing the fringe benefit, even if a third party actually provides it. Typically, benefits are either geared toward work-related costs or contribute toward employees’ job satisfaction. A few examples include office equipment, food, education, and transportation.
If you are trying to decide which benefits to offer, an idea is to align them with your organizational values. For example, Airbnb offers an annual travel stipend to its employees, while Hinge gives its team a monthly date stipend.
Now, labor laws and employment regulations do place certain limitations on some types of fringe benefits. As we know, some are taxable while others aren’t. Then there are also those that are legal requirements within the organization.
Depending on a company’s size and industry, it may be obligated to provide certain benefits to its team.
A few examples of fringe benefits that are legally required in some cases include health insurance, family and medical leave, unemployment insurance, and workers’ compensation.
Employees pay tax on their salary, bonus, and other forms of compensation they receive from your organization. Taxes consist of federal income tax, social security and Medicare taxes, and even state income tax.
A fringe benefit is taxable under specific circumstances, usually if it’s a money equivalent. For example, if the business gives your employee a car service or gift card, it will be included as taxable income.
To give you an idea of which fringe benefits are considered taxable, here are a few examples
Non-taxable fringe benefits are fringe benefits that fall outside of what the IRS deems taxable. As an employer, you can provide your workforce with tax-free benefits that don’t increase their taxable income.
Let’s look at these in more detail.
Professional development support helps your employees learn new skills that can further their careers. This perk can be non-taxable for up to $5,250 per annum per employee. It does not include related supplies other than textbooks.
The exception to this allowance is if your company directly provides professional education.
As a company, you can give your workforce tools and software that support their professional development and productivity without needing to consider tax repercussions. The benefit covers communications software like Slack, code editors, and project management apps.
However, this exemption falls away if the employees are using them solely or primarily for personal reasons outside of work.
De minimis fringe benefits refer to the minimal value perks you provide to your workforce on an irregular basis. Typically, they have so little value that it is impractical or unreasonable to account for them, according to the IRS.
A few examples of de minimis benefits include ad hoc SWAG items such as mugs or t-shirts, employee gifts for anniversaries or holidays, and occasional personal use of business-provided cell phones, photocopiers, printers, and so on.
Food and refreshments can also be tax-free if they have a low fair market value and are not regularly provided. Think of the odd office cakes and coffees or occasional team picnics and parties. Then, meal stipends might be common non-taxable fringe benefits if your employees are required to work overtime on occasion.
To determine whether a benefit qualifies as de minimis, consider its frequency and value. A de minimis benefit will be unusual or occasional in its recurrence, of a low value, and not be disguised as a form of compensation.
Team members who work from home can get a tax-free equipment stipend from your organization to buy a desk, chair, mouse, and more.
The condition here is that if they ever left the business, they would return the equipment they purchased. If they were to keep the equipment, it would then become a taxable benefit.
Similarly, if they only use the equipment partially for work, it would be taxable based on the ratio of work to personal use. For example, if a person with a work laptop used it 50% of the time for official work-related purposes, then only 50% of the costs would be deemed non-taxable.
Another tax-deductible perk for your organization is employee parking. You can pay your workforce an amount of up to $270 a month to cover their parking for work.
For anyone who doesn’t drive, you can pay up to $255 per month tax-free for mass transit passes or vanpool transportation to get to the office.
Any employees who primarily work from home can submit a receipt to show their internet usage. This can then be considered a tax-free reimbursement as long as it is for work purposes.
Generally speaking, health benefit plans and programs, such as gym memberships, meditation apps, or fitness classes, form part of your workforce’s taxable income. But, there are non-taxable exceptions where your organization can support its employees’ health and wellness.
One example is if you have an on-premise gym or athletic facility that offers fitness classes like yoga, boxing, or aerobics.
Of course, there may be a bit of a grey area around this, depending on whether or not you offer these benefits free of charge. Here, it’s best to seek professional advice so that you are aware of the rules and requirements around employee taxation.
If you offer a perk-packed employee compensation package, it can be challenging to keep track of what falls into the non-taxable fringe benefits space. However, it’s an exercise worth doing as it factors into employee productivity, happiness, and retention.
Your payroll and accounting team should be able to give you insight into which benefits qualify as taxable, as well as how to value and report them. If not, look up a professional who can provide advice in this regard. The last thing you want is to get taxation wrong as it can impact both the business and your workforce.