Taxable Fringe Benefits - Explanations and Examples

Here is a quick breakdown of taxable benefits, with examples!

8
 min. read
November 25, 2021

Fringe benefits, including taxable fringe benefits, have become part and parcel of almost every employment contract. While the additional perks are great, people sometimes forget the tax element of some of these benefits. 

Here is a quick explanation of taxable benefits, with insightful examples, too! For a more complete breakdown of handling fringe benefit taxation, please check out our downloadable guide.

What Are Taxable Fringe Benefits? 

Fringe benefits are essentially additional employee perks and benefits that offer added compensation on top of the employee’s base salary or wage. Fringe benefits generally take the form of either services, cash, cash equivalents or discounts, or property. 

Think of it this way, when a person is employed, they earn a certain amount of money. This could be on a monthly, weekly, or hourly basis. This income is their base income. The fringe benefits are any added extras on top of that income, like free cafeteria food, a gym membership, or healthcare insurance. 

The fringe benefits offered will often vary depending on the company and the employee’s position within the company. Some fringe benefits are also taxable to the employee and so need to be added to tax forms as a supplemental income. These are what we call taxable fringe benefits.

The Origins Of Fringe Benefits

The concept of fringe benefits has been around since the Middle Ages, where workers would sometimes receive extra food or clothing in addition to their regular compensation. 

Modern fringe benefits then emerged during the late 19th century when railroad and mining companies began offering their employees access to a company doctor. Then, during World War II, more companies and businesses began offering their employees access to health insurance programs. This was in an attempt to keep them from quitting and joining competing companies. 

However, it wasn’t until the late 1940’s that the term ‘fringe benefits’ was coined. Soon after, the US government passed laws defining which benefits were exempt from tax and which were taxable. 

How Do They Work?

Taxable fringe benefits can take on many forms. For example, one of the common forms of fringe benefits is intangible fringe benefits. These include things like using a company car, life or health insurance, and flexible work schedules. 

An employer decides which benefits to offer. The employer also decides which benefits to offer to certain employees and which benefits go hand in hand with certain positions. For example, a manager might get a large office, while a regular employee receives a cubicle. Employees in higher ranks may also access better fringe benefits, like parking. 

The distribution of benefits remains entirely up to the employer. 

The Difference Between Non-Taxable, Tax-Advantaged, and Taxable Fringe Benefits

There are three kinds of fringe benefits: non-taxable benefits, taxable fringe benefits, and tax-advantaged fringe benefits.

Non-Taxable Fringe Benefits 

Non-taxable benefits, as the name implies, are free from tax and are generally excluded from the employee’s taxable compensation. These benefits fall under the category of de minimis benefits. This means that the benefits are worth so little in value that they are difficult to account for. 

An example of this could be a gift card an employee receives for their birthday or a holiday. It also includes any snacks or food given at company events or meetings. 

In general, meals aren’t taxable. For example, if the employer buys a meal for his employees on a business trip or a business meeting, it could be considered a benefit. This would make the meal tax-free since it happened during business hours. 

Other non-taxable benefits include healthcare insurance, profit sharing, stock bonus plans, transportation benefits, employee discounts, and dependent care.

Taxable Fringe Benefits 

A common misconception many people have is that all fringe benefits are exempt from being taxed. Unfortunately, this is far from true. 

In fact, any fringe benefits that are offered as a bonus are considered a taxable income. These benefits should be added to the W-2 tax form each year. 

While there are a few exceptions listed in the IRS guidelines, they are few and far between. 

Common taxable benefits include the relocation expenses for an employee move, reimbursement for mileage expenses, or the reimbursement of education or tuition fees. Employee bonuses are also considered taxable income.

Fringe benefits that have considerable value are taxable to the employee and are commonly subject to Medicare taxes, federal withholding, and social security. In essence, the value of the fringe benefit is added to the employee’s base income and thus, needs to be added to their tax forms.

Examples of Taxable Fringe Benefits

Here are a few examples of some common taxable fringe benefits:

  • Awards: This could be cash or gift certificates to popular resorts, spas, or stores. 
  • Clothing: Clothing is only a taxable fringe benefit if you can wear it as streetwear. 
  • Moving expenses: If an employee moves less than 50 miles from their current residence, any moving benefits are taxable. However, if they are moving further than 50 miles, the benefit is no longer taxable. 
  • Education Reimbursement: If the company offers to pay for a portion of the employee’s educational expenses that aren’t job-related, this becomes a taxable fringe benefit. 
  • Bonuses
  • A fitness club membership
  • Frequent flyer miles
  • Life insurance

Tax-Advantaged Benefits

Another category of fringe benefits is tax-advantaged benefits. These benefits are perks and programs that decrease an employee’s taxable income. The aim of tax-advantaged benefits is to create monetary savings for both the employer and employee. 

On the surface, tax-advantaged benefits can seem quite complicated, but they are really simple once you get the hang of it. They involve taking an ordinary non-taxable benefit paid for by an employee and having the employer offer to pay for the expense directly with pre-taxed cash. 

This can feel quite complicated when starting out, but the pros of using tax-advantaged benefits far outweigh the cons.

Making the Most From Taxable Benefits

Now, it might seem counterproductive to offer fringe benefits only to have your employees taxed for them. But, there are ways to make it worth their while. But, you can avoid forcing employees into a higher tax bracket through a tax gross-up. This means that the employer offers the employee the gross amount that they’ll owe in taxes. 

Basically, you must estimate how much you think the employee will claim for their fringe benefits annually. Add this amount to the payroll for tax withholding and account for these taxes on the paycheck. 

For example, let’s say that you offer an employee around $100 per month in fringe benefits. The payroll system would then account for the additional $100 in income and withhold the right amount of taxes for the employee. 

Then, at the end of the financial year, you can adjust this to the actual amount spent. Generally, the actual amount ends up being lower than the estimated amount, so the employee can enjoy a tax credit instead of owing money. 

Valuing Fringe Benefits

When dealing with taxable fringe benefits, it is important to know the fringe benefit rate. While this isn’t hard to calculate the fringe benefit rate, you’ll need to know the total value of the fringe benefits offered before you can calculate it. 

As a general rule of thumb, the easiest way to approach this is to use the fair market value of the benefit offered. In many cases, the fair market value is equal to the actual value of the benefit. 

In some cases, especially if the employer has received a discount, the fair market value might actually be higher than the actual value of the fringe benefit.

We advise that you check out the IRS Fringe Benefits Guide mentioned above to help you value your fringe benefits. 

In Summary

Taxable benefits have been around for ages and have become a staple offering of nearly every company and business. 

These days, a company isn’t considered competitive if it doesn’t offer fringe benefits in line with market standards. While taxable benefits might seem counterproductive, they are a great way of making your employees feel appreciated and cared for.  

There are also methods, like the tax gross-up method, that can be used to make the most of your taxable benefits. 

Learning how these benefits work and improving your employees’ benefits experience can be just what you need to up employee satisfaction. All notable brands and businesses make an excellent employee experience a priority. Learn how Hubspot and Deloitte keep their employees happy with amazing perks and benefits.