Fringe Benefits – What’s All the Fuss About?

In light of the recent media coverage of the Trump Organization indictment, you may be asking yourself what are fringe benefits and why is this such a big deal? Employers often find employee compensation and fringe benefit issues challenging. Providing an attractive working environment and keeping employees satisfied can sometimes lead to hidden costs that many employers and employees may not be aware of.

This article will highlight some of the most common fringe benefits and discuss whether these benefits are included in the employee’s compensation or if they are tax-free. It is not meant to be a comprehensive review of all possible fringe benefits available to employees.

What exactly is a fringe benefit?

In essence, anything an employer provides to or for the benefit of an employee in excess of the employee’s salary is considered a fringe benefit. Certain fringe benefits may be required by federal or state law while others are a way for the employer to show appreciation to an employee. Common examples of fringe benefits include health and dental insurance, 401K and other retirement plans, disability insurance, paid time off and holidays, use of company vehicles, cell phones, use of corporate jets, tuition reimbursements… and the list goes on and on. At this point you are probably asking yourself, do I need to include every meal, cup of coffee, reimbursement, employee discount or other benefit that I offer my employee in their annual compensation (Form W-2)? The short answer is… it depends.

Tax treatment of fringe benefits

Some fringe benefits are tax-free and excludable from the employee’s compensation. Most employers and employees are aware of these standard benefits and their tax treatment. Federal and state laws also specifically exclude certain benefits from an employee’s annual compensation.

Examples of common tax-free benefits include:

• Section 125/cafeteria plan benefits (dependent care, health savings accounts)
• Health, dental & vision insurance premiums
• Benefits provided for working conditions (cell phone, transportation, meals)

What about the not-so “cookie cutter” benefits employers provide? Here is where a lot of the confusion arises and where the advice of payroll specialists and your accountant will help you navigate the correct reporting requirements.

• Education assistance
  • What if an employer wants to reimburse an employee for their tuition costs? Depending on the amount, this may be tax-free. An employer can provide up to $5,250 each year for an employee’s tuition costs tax-free. This can include the cost of books and supplies. Any amount above $5,250 would be included in the employee’s annual compensation. The major stipulation here is that the student must be the employee themselves, not a child of the employee.
• Use of company vehicles
  • This is a common area of confusion and errors in the treatment of taxable fringe benefits. The use of a company vehicle for business purpose is tax-free (example: delivery vehicles, meeting with clients). Personal use of a business vehicle may be taxable and require inclusion in the employee’s annual compensation.
  • In the automotive dealership industry, this is a common benefit provided to salespeople. Dealerships will allow a full-time salesperson to use the demonstrator cars until the demo car is sold. According to IRS Publication 15-B [1], the demo car must be used primarily to facilitate the services the salesperson provides and there must be substantial restrictions on personal use. IRS Revenue Procedure 2001-56 provides simplified methods for determining if full, partial or no exclusion of income to the employee applies for the personal use of a demonstrator vehicle.
• Awards
  • What about the gold watch or earrings provided to employees for their 10-year anniversary with the company or for reaching their monthly sales goal? Good news! The value of tangible personal property provided to an employee as an achievement award is excludable from the employee’s compensation. Monetary awards or vacations are not excludable and must be added to the employee’s annual compensation.
• Athletic facilities
  • How are gym memberships treated? These are becoming a popular employee benefit and depending on the circumstances may be fully excluded from an employee’s compensation.
  • To be fully excluded the gym or other athletic facility must be an on-premises gym or other athletic facility operated by the employer if all use of the facility is by employees, their spouses, or dependent children. The facility cannot be open to the public.
  • Paying for an employee’s membership to a local gym in town would not be excludable from the employee’s compensation.
• Lodging
  • The cost of lodging provided to employees is excludable if it meets the following tests:
    • Is furnished on business premises
    • Is furnished for the employer’s convenience, and
    • The employee accepts it as a condition of employment
    • Example: Let’s say you operate a residential apartment building, and you hire a maintenance worker to always be on call for issues that may arise, and he accepts that as a condition of employment, he will be living in one of the apartments in the building. The value of this lodging would be excludable from the employee’s income since it is located on business premises, furnished for your convenience, and the employee accepts it as a condition of employment. However, paying for an employee’s apartment or condo or providing a cash allowance for their living quarters is NOT excludable and must be added to the employee’s annual compensation.
  • The cost of temporary work housing qualifies for exclusion if the employee is traveling away from his/her tax home and the work assignment is for one year or less. For example, a dealership assigns their New Jersey based general manager to a temporary work assignment in Miami, Florida to open a new dealership location. As long as this work assignment is one year or less, the cost of the employee’s temporary housing is excludable from the employee’s compensation.
• Use of company airplane/jet
  • The use of a company jet by employees is excludable from the employee’s compensation if it is for business purposes only. However, if the employer allows an employee to use the company jet for his/her family vacation or other personal matters, the personal use of the jet would be includable in the employee’s annual compensation.

As you can see, we have just scratched the surface on the various fringe benefits that may be available and offered to employees. Each benefit has its own set of nuances and navigating the appropriate treatment of these benefits can be cumbersome for an employer. It is important to note there are differences in the taxability of certain fringe benefits based upon the employee’s classification (highly compensated employee, greater than 2% shareholder, and so forth). Certain fringe benefits may be excluded from income for a regular full-time employee, but not excluded for a highly compensated employee.

To minimize uncertainty, it would be beneficial for employers to describe the various types of fringe benefits provided to employees in their employee handbook or manual.

Author: Kristin Reese-Scalabrino, CPA | [email protected]

[1] IRS Publication 15-B Employer’s Tax Guide to Fringe Benefits https://www.irs.gov/pub/irs-pdf/p15b.pdf