Taxable vs Non-Taxable Fringe Benefits: What Can Be Excluded From Income
The tax treatment of fringe benefits can be daunting to any employer. This starter guide gives some common employee fringe benefits that can be excluded from income.
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On this blog, we’ve previously tackled the question of “What are fringe benefits?” As a quick refresher, IRS Publication 15-B, the Employer's Tax Guide to Fringe Benefits, defines a fringe benefit as “a form of pay for the performance of services.”
An employer is the provider of a fringe benefit, even if a third party provides the actual benefit. Fringe benefits are taxable unless they are specifically excluded from an employee's income.
Here, let’s take a deeper dive into the most common fringe benefits that can be excluded from income.
Tax-Free Fringe Benefits for Employees
Below, we’ve outlined some common employee fringe benefits. For more information, please review IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits.
While the following information is current for this year, the IRS changes the exclusion limits annually. Be sure to double check with a tax professional to be sure you’re using the most up-to-date information.
In our previous article, take a look at the section entitled: Classifying an Employee as a Non-Employee For Specific Fringe Benefits. There, you’ll find more information about the various types of ineligible employees defined by the IRS. We hope this helps you navigate which employees are exempt from which fringe benefits.
Related Article: Understanding Supplemental Wages and Tax Rates
Health Benefits for Employees
Accident & Health Benefits (Fully Insured)
What it is: Accident & health plans. Also applies to payments made to an employee under an accident plan.
Who’s exempt from income tax withholding: Most employees, with the exception of greater than 2% shareholders of an S-corporation.
Accident & Health Benefits (Self-Insured)
What it is: Self-insured plans that do not favor highly compensated employees. Includes medical care reimbursement plans.
Who’s exempt from income tax withholding: Most employees, with the exception of greater than 2% shareholders of an S-corporation, provided that the benefit does not discriminate in favor of highly compensated employees.
Health Savings Account (HSA)
What it is: Employer contributions up to specified dollar limits are exempt from federal income tax withholding, FICA taxes, and FUTA. (For 2023, employers can contribute up to $3,850 for self-only coverage under an HDHP or $7,750 for family coverage under an HDHP to a qualified individual's HSA. Individuals who are age 55 or older may contribute an additional $1,000 a year.) For more information refer to IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
Who’s exempt from income tax withholding: Most employees, with the exception of greater than 2% shareholders of an S-corporation, provided that the benefit does not discriminate in favor of highly compensated employees.
Related Article: What is a Health Savings Account? Your HSA Questions, Answered.
Workplace Benefits
Working Condition Benefits
What it is: Property and services provided to an employee so that the employee can perform their job.
Who’s exempt from income tax withholding: All employees, provided it satisfies the necessary requirements.
Understanding the employment tax treatment of fringe benefits may not be totally straightforward, but we hope this overview gives you a good place to start. Again, it’s always a good idea to consult with a tax professional to make sure you’re doing everything correctly!
Childcare Benefits
Adoption Assistance
What it is: An employer may pay or reimburse adopted expenses an employee incurs. An employer shouldn't pay more than 5% of its payments during the year for shareholders or owners (or their spouses or dependents) and the benefit should not favor highly compensated employee. All payments must be reported on Form W-2 in Box 12 with Code “T”. For more information see Instructions for Form 8839, Qualified Adoption Expenses.
Who’s exempt from income tax withholding: Most employees, with the exception of greater than 2% shareholders of an S-corporation.
Related Article: New York Paid Family Leave and Its Impact on Small Businesses
Dependent Care Assistance
What it is: An employer can pay for or provide dependent care assistance to employees, exempt up to certain limits, $5,000 ($2,500 for married employee filing separate return) per year. Value of all payments must be reported in Box 10 of Form W-2. Excess payments must be included in Boxes 1, 3 and 5. The benefit may not discriminate in favor of highly compensated employees.
Who’s exempt from income tax withholding: All employees, provided that the benefit does not discriminate in favor of highly compensated employees and it satisfies the necessary requirements.
Financial Benefits
Employee Discounts
What it is: This exclusion applies to a price reduction given to employees on property or services you offer to customers. The discount may not be more than the gross profit percentage times the price charged to non-employee customers or not more than 20% of the price charged non-employee customers. The benefit may not discriminate in favor of highly compensated employees.
Who’s exempt from income tax withholding: All employees, provided that the benefit does not discriminate in favor of highly compensated employees and it satisfies the necessary requirements.
Employee Stock Options
What it is: There are three kinds of stock options—incentive stock options, employee stock purchase plan options, and nonstatutory (nonqualified) stock options. Different rules apply to each, so it’s best to check sections 83, 421, 422, and 423 of the Internal Revenue Code and their related regulations for more information about employee stock options.
Who’s exempt from income tax withholding: It depends on a number of factors.
No-Additional-Cost Services
What it is: Services that are offered to customers in the ordinary course of business that can be offered to employees without incurring any substantial additional costs. Includes excess capacity services, such as airline, bus, or train tickets; hotel rooms; or telephone services provided free or at a reduced price to employees working in those lines of business. The benefit may not discriminate in favor of highly compensated employees.
Who’s exempt from income tax withholding: All employees, provided it satisfies the necessary requirements.
Qualified Transportation (Commuting) Benefits
What it is: An employer can provide qualified parking, transit passes, and/or rides in a commuter highway vehicle. In 2023, there is an exclusion for transportation benefits up to $300 a month. See IRS Publication 15-B for details.
Who’s exempt from income tax withholding: Most employees with the exception of greater than 2% shareholders of an S-corporation.
Retirement Planning Services
What it is: You may exclude from an employee's wages the value of any retirement planning advice or information you provide to your employee or their spouse if you maintain a qualified retirement plan. Does not include services for tax preparation, accounting, legal, or brokerage services.
Who’s exempt from income tax withholding: All employees, provided it satisfies the necessary requirements.
Related Article: 4 Reasons To Offer A 401(k) At Your Company
Tuition Reduction
What it is: An educational institution can exclude tuition reductions for qualified employees, dependents, and those retired or on disability. Exempt if for undergraduate education (or graduate education if the employee performs teaching or research activities).
Who’s exempt from income tax withholding: All employees, provided it satisfies the necessary requirements.
More Voluntary Benefits for Employees
Achievement Awards
What it is: This is an award that is given to an employee for either length of service or a safety achievement. Cannot include cash or intangible property such as vacations, meals, lodging, tickets, stocks, or securities. Limited to a value of $1,600 per year. See chapter 2 of IRS Publication 535, Business Expenses, for more details.
Who’s exempt from income tax withholding: Most employees, with the exception of greater than 2% shareholders of an S-corporation.
Athletic Facilities
What it is: An employer can provide athletic facilities to its employees tax-free provided that (i) the facility must be located on premises the employer owns or leases, and (ii) it is operated by the employer exclusively for the use of current or retired employees, their spouses, and dependent children. Partners in a partnership are treated as employees for this benefit.
Who’s exempt from income tax withholding: All employees, as well as former employees, partners and widows or widowers of former employees, provided it satisfies the necessary requirements.
De Minimis Benefits
What it is: Publication 15-B states that “a de minimis benefit is any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administratively impracticable.” Cash or cash equivalents (such as gift cards) are never excludable. Specific types of de minimis benefits are included elsewhere in this list.
Who’s exempt from income tax withholding: All employees, provided it satisfies the necessary requirements.
Educational Assistance
What it is: An employer may provide educational assistance to an employee up to $5,250 per year; if you provide an employee with assistance exceeding $5,250, you must include the value of these benefits as wages, unless the benefits are working condition benefits. Graduate courses may also satisfy this exclusion. Educational assistance may include the cost of books, equipment, fees, supplies, and tuition. Employer must have a qualified written plan. Value of benefit is based on when a course begins, not when the benefit is paid. The benefit may not discriminate in favor of highly compensated employees.
Who’s exempt from income tax withholding: All employees, provided that the benefit does not discriminate in favor of highly compensated employees and it satisfies the necessary requirements.
Related Article: Pros and Cons of Offering Tuition Reimbursement to Your Employees
Employer-Provided Cell Phone
What it is: De minimis fringe only if there are noncompensatory and substantial business reasons for providing the phone.
Who’s exempt from income tax withholding: Often employer-provided cell phones will not satisfy the noncompensatory business purpose requirement, so the value of the personal use of a cell phone will be considered taxable.
Group-Term Life Insurance
What it is: An employer can generally exclude up to $50,000 of the cost of group-term life insurance. Excess value of coverage is subject to federal income tax and FICA, but not subject to FUTA. The value of the excess coverage must be reported on the Form W-2 in Boxes 1, 3, and 5 and in Box 12 with Code C. For more information on how to calculate the value of the coverage, see Table 2-2 of IRS Publication 15-B.
Who’s exempt from income tax withholding: Most employees, provided that the benefit satisfies the necessary requirements, with the exception of greater than 2% shareholders of an S-corporation.
Lodging
What it is: The value of employer provided lodging can be excluded only if (1) it is furnished on business premises, (2) it is furnished for the employer's convenience, and (3) the employee must accept it as a condition of employment.
Who’s exempt from income tax withholding: Most employees, with the exception of greater than 2% shareholders of an S-corporation.
Meals (De Minimis)
What it is: Meal or meal money that has so little value that accounting for it would be unreasonable. Includes such things as coffee, doughnuts, soft drinks, and occasional meals that enable an employee to work overtime. The benefit may not discriminate in favor of highly compensated employees. Even non-de minimis meals may be exempt if they are furnished on the business premises and they are furnished for the employer's convenience.
Who’s exempt from income tax withholding: For non-de minimis meals, most employees with the exception of greater than 2% shareholders of an S-corporation.
If you're ready to start offering your team access to high-quality benefits (fringe or not), we're here to help. Check out all we have to offer or reach out to learn more!
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