Employers entice new applicants and even loyal employees by offering a great total compensation package. In addition to basic pay or salary, fringe benefits, or commonly known as perks, are also being offered. Of course, like basic benefits, the Form W-2 must include taxable fringe benefits that are subject to withholding taxes unless made exempted by the law.
But how should fringe benefits be taxed? Learn more about taxable and non-taxable fringe benefits and how they’re calculated by reading below.
Non-taxable Fringe Benefits
Generally, anything that’s given by employers to employees should be taxable. However, there have been exemptions made to help employees save as much of their net pay as possible to enjoy working long-term in a company and improve their quality of life.
Fringe benefits come as taxable (tax amount reduced on the employee’s pay) or as non-taxable. A long IRS list of non-taxable benefits includes the following examples:
- Health Insurance: Company-provided health insurance are not taxable.
- Life Insurance Coverage: Protects the employee’s beneficiaries from the financial burden in time of the employee’s death.
- Disability Insurance: Provides disability insurance coverage to disabled employees.
- Dependent Care Assistance: Child care assistance for full-time employees through bonuses or on-premise daycare center.
- Educational Assistance: Training courses or seminars that employees undergo to enhance knowledge and skills.
- Achievement Awards: Gifts or low-value cash incentives for a length of service employees.
- Commuting Benefits: Use of company vehicle when under duty.
- Supplemental Unemployment Benefits: Discretionary unemployment benefits given to workers that are fired.
- De minimis or Minimal Benefits: These benefits are low-value fringe benefits such as holiday, wedding, and birthday gifts, traditional awards, and theater and event tickets.
- Cafeteria Plans: It includes occasional meal plans, such as meal allowance for overtime employees.
- Working Condition Fringe Benefits: A good example is a laptop or computer provided to an employee to effectively and efficiently work at home.
When Fringe Benefits Become Taxable
While common fringe benefits are exempted from being taxed, the IRS specifies limitations.
Here are some scenarios of how fringe benefits are being taxed:
- Excessive Mileage Reimbursements
When payments made to a worker for business-related driving exceed the IRS’s standard mileage rate, it becomes a taxable income.
- Bicycle Commuting
Employers could provide up to USD$20 a month of bicycle commuting benefit to employees until 2018. The Tax Cuts and Jobs Act makes bicycle commuting benefit taxable from 2018 through 2025.
- Moving or Relocation Expenses
Until 2018, workers who moved 50 miles for their current job could receive tax-free reimbursement for moving expenses. The Tax Cuts and Jobs Act considers this benefit taxable until 2025. Thus, any reimbursement of expenses for workers moving less than 50 miles is always taxable.
- Excessive Education Reimbursements
Educational assistance payments not related to the job or exceed the allowable exclusion of the IRS are taxable.
- Working Conditions Benefit
A company car or mobile phone used outside of business is taxable (however, these benefits could also be eligible as non-taxable de minimis). Employees must meet the required documentation to apply for the deduction.
Uniform or clothes given to employees suitable for streetwear are a taxable fringe benefit.
- Awards and Prizes
All cash awards and prizes are taxable unless donated to charity. Also, non-cash awards and prizes are taxable unless given to charity or nominal in value.
Deferred Compensation Plans
President Donald Trump recently issued a Department of Treasury directive to allow payroll tax deferral from September 1, 2020, to December 31, 2020. The deferral applies to the Social Security aspect of employee wages, which is a basic employee benefit. It means that the tax for Social security is not collected or postponed. So, can fringe benefits be deferred, too?
With a deferred compensation plan, a portion of an employee’s pay is withholding until a specified period, usually during retirement. It means that the lump-sum money owed to an employee is paid out on the specified date. Some good examples of deferred compensation include employee stock options, pensions, and retirement plans.
Participants can withdraw deferred compensation funds penalty-free with a 401(k)-retirement plan after 59½ of age.
The IRS Rule of 55 has a loophole because it allows anyone between 55 to 59½ years old to withdraw funds without penalty or tax if they were laid off or quit their job.
Employer Tax Deductions
When starting a business, you should consider studying business taxes. Business taxes come in different forms, and it would be beneficial to know how a business owner or employer can reduce business tax while benefiting employees by providing fringe benefits.
Employer tax deductions may apply with the following:
- Business-related Automobile Mileage: This refers to any travel made for business-related purposes. The IRS allows the straight-mileage approach, which multiplies the cents-per-mile permitted by the IRS by the number of miles attributed to the vehicle’s business use at 40.5 cents in 2006.
For instance, a small business owner who drove 2,000 miles at .500 per mile would gain a deduction of USD$1000.
- Entertainment and Travel: The costs for entertainment and travel are only tax-deductible if they’re directly related to business. If they include a personal element, the deductible expenses are only 50 percent.
- Depreciation: This tax-deductible business expense is under the IRS Code’s Section 179. Small business owners can take advantage of depreciation by writing off the first USD$18,000 of any business-used equipment purchased.
- Employee Benefits: Fringe benefits are usually tax-deductible, such as pension and retirement plans for small business owners and self-employed individuals. Health insurance can be tax-deductible, too.
Under the IRS Code Section 105, a small business owner can create a medical reimbursement plan wherein the business owner and the spouse can be covered. The entire bill becomes a tax-deductible business expense.
As discussed, fringe benefits that are offered as a bonus to employees from employers are considered taxable income. The Internal Revenue Service (IRS) has a specific list excluding some benefits from being taxed, such as thee minimum and non-cash gifts in nominal value.
Fringe benefits have tax benefits for both employees and employers. But, of course, the way they are taxed depends on the usage and value. Deferred compensation plans provide tax benefits to employees since the amount of net pay is decreased, and the employee will only pay tax upon withdrawal of funds. On the other hand, to reduce business taxes, employers can have tax deductions with the fringe benefits they provide to employees.