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Updated at 2018/07/10
A:

Common fringe benefits provide employees total compensation above and beyond stated wages or salaries, and a wide range of fringe benefits are offered from employers. To take advantage of an employer’s fringe benefits in the most effective way, it is important for employees to understand how common fringe benefits are considered for taxation purposes.

Taxable Fringe Benefits

Any fringe benefit offered as a bonus to an employee from an employer is considered taxable income, unless it falls under a specific list of excluded benefits as determined by the IRS. Taxable fringe benefits must be included on an employee’s W-2 each year, and the fair market value of the bonus is subject to withholding.

The most common fringe benefits considered a taxable part of total compensation include reimbursement for mileage expenses that exceed the limitations provided by IRS guidelines, relocation expenses for an employee who moves for employment that is less than 50 miles away, and reimbursement of education or tuition expenses that are not directly related to job performance or are in excess of stated IRS limits. In addition, a bonus that falls under the category of a working conditions benefit, such as a mobile phone or company car, is considered taxable if used outside of business.

Fringe Benefits Excluded From Taxation

Although some fringe benefits are considered a part of taxable income for employees, a lengthy list of common fringe benefits are excluded from an employee’s taxable compensation. First, fringe benefits that fall under the definition of de minimis benefits are not taken into consideration when determining taxable income. De minimis benefits are those that hold such a minimal amount of value that employers would have a difficult time accounting for them. For instance, a gift card given to an employee for a holiday or birthday is considered a de minimis benefit, as are refreshments or snacks provided during a business meeting.

Typically meals are not considered a taxable fringe benefit for employees, although certain qualifications must be met. Employers buying lunch or dinner for employees must provide the meal on business grounds, and it must be offered to the benefit of the employee. This means a meal could be a tax-free benefit to employees when offered during a lengthy meeting or during required overtime.
Other fringe benefits not considered taxable to employees include health insurance up to a maximum dollar amount; dependent care; group term life insurance; qualified benefits plans such as profit sharing or stock bonus plans; commuting or transportation benefits; employee discounts; and working condition benefits only used for business purposes.

Employers offer a wide range of fringe benefits as a recruitment or retention strategy, and these benefits can make up a substantial portion of an employee’s total compensation. To fully compare benefits packages between employers, however, it is important to understand how common fringe benefits are taxed.


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