As an employer, it’s likely you’ve heard about benefits before. But do you know what fringe benefits are?
To understand fringe benefits, it’s important that you know how employees are paid. Employees are normally paid wages via written or printed checks, direct deposit, payroll cards, or sometimes cash.
No matter how they’re paid, all wages paid to employees are considered taxable income and subject to income tax withholding.
Clear up any confusion around fringe benefits.
Employers are also required to provide certain benefits to their employees(i.e., workers’ compensation coverage and contributions to state disability programs). However, some employers may want to offer other benefits as a way to reward, attract, or retain quality employees as well.
Knowing this, let’s dive into what fringe benefits are, and how they’re subject to income taxes.
What Are Fringe Benefits?
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.” Fringe benefits are often considered extra benefits outside of a company’s standard health insurance offerings.
Technically, the employer is the provider of the fringe benefit, even if a third-party service provides the actual benefit. For example, an employee may receive legal services through an attorney that is paid by the employer. Even though the employer doesn’t provide the legal services directly the employer is still considered the provider of the fringe benefit.
Similarly, the employee is considered the recipient of the fringe benefit in exchange for services, even if the fringe benefit is provided to someone who isn’t employed by the employer in question. For example, if an employee’s family member benefits from a company-sponsored gym membership, the employee will still be considered the fringe benefit recipient.
What Are Fringe Benefit Examples?
Here are some other common examples of fringe benefits:
Employee stock options
Tuition reduction or assistance
Fringe Benefits Are Taxable — With Exceptions
As an employer, are you aware of what counts as reportable fringe benefits? It’s important to know that nearly all fringe benefits are taxable. The value of a fringe benefit is subject to a number of taxes, including federal income tax, Social Security tax, Medicare tax, and FUTA. The value of a fringe benefit must also be included in Boxes 1, 3, and 5 of Form W-2, and on line 3 of Form 940.
That said, it’s also key for employers to know that the taxable portion of a fringe benefit may be reduced by the following amounts:
Any amount that the law excludes from compensation, such as low-cost holiday gifts or achievement awards; and
Any amount that the recipient pays for the benefit.
It would be a mistake to assume that a fringe benefit may not be taxable just because it isn’t specifically listed anywhere in the tax law, or in one of the IRS publications. Typically, the only fringe benefits that are specifically discussed in the tax laws are those that might be excluded from income, either in whole or in part.
Additionally, any or all of a fringe benefit can be excluded from taxable income if the recipient is not an employee. If the recipient of a fringe benefit is not an employee, then the fringe benefit isn’t subject to any income tax withholding. However, it might have to be reported as income elsewhere — such as on Form 1099-NEC for independent contractors, or a Schedule K-1 for partners.
Classifying Non-Employees for Fringe Benefits
When it comes to certain fringe benefits, an individual who’s normally treated as an employee might be classified by definition as a non-employee.
The following is a list of employees who might not be treated as employees when it comes to certain fringe benefits:
An employee who owns more than 2% of the stock in an S-Corporation [S2%].
A highly compensated employee (HCE) who is either an officer, a shareholder who owns more than 5% of the voting power, highly compensated based on the circumstances, or a spouse or dependent of a person described above [HCE5%].
An HCE who is either one of the five highest paid officers, owns more than 10% of the employer's stock, or is among the highest paid 25% of all employees [HCE10%].
An HCE who is either a 5% owner at any time during the year or the preceding year, or received more than $150,000 in pay for the preceding year [HCE$115].
A key employee who is either an officer having annual pay of more than $185,000, or an employee who is either a 5% owner of the business or a 1% owner of the business whose annual pay is more than $150,000 [Key].
If you’re looking for a complete list of fringe benefits that can be excluded from income taxes, check out IRS Publication 15-B, the Employer’s Tax Guide to Fringe Benefits.
Fringe Benefits FAQs
Are Fringe Benefits Subject to FICA?
FICA, also known as the Federal Insurance Contributions Act, is a mandatory payroll tax that is equally split between employees and employers.
Most fringe benefits are subject to FICA, as well as income tax withholding and employment taxes, although there are some fringe benefits that may be considered nontaxable.
Can Fringe Benefits Be Paid in Cash?
Yes. Bonuses that take the form of cash are considered a fringe benefit and must be reported as supplemental income on the employee’s W-2.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.