Understanding the Taxability of Fringe Benefits

I’d like to think that most business owners truly want to have employees who feel appreciated and are generally happy with their jobs and their compensation.  Happy employees generate a positive work culture which is contagious, spreading not only among employees but also to customers and clients as well. 

If you are a business owner who is investigating ways to create that positive culture, you might want to think about offering some fringe benefits to your employees.  As you evaluate your fringe benefit offerings, one point that must be considered is the taxability of your benefits.

Some benefits are completely tax-free to both the employer and the employee.  One common nontaxable benefit provided by many employers is health insurance.  Other benefits are directly related to work, such as provision of a car for work travel, reimbursement for meals or lodging when traveling for work, or work condition fringe benefits, which are property or services necessary for the employee to perform his/her job.  Other benefits address the aspirations common to many employees, such as providing assistance for job-related educational expenses or offering membership to health or athletic facilities.

Another common category of tax-free benefits is de minimis fringe benefits, which are benefits of minimal value.  Examples of de minimis benefits might include snacks or drinks, occasional tickets to entertainment or sporting events, or an annual picnic for employees or for employees and family members.  Finally, employers may give out awards to recognize employees for years of service or for meeting safety expectations.

While some benefits are not subject to tax at any time, there are other benefits that are only tax-free up to certain monetary limits.  These include qualified transportation benefits, non-job-related educational assistance, dependent care assistance, and group term life insurance.

Still other benefits are only tax-free for certain types of employees.  These can be provided without tax to rank-and-file employees but not to those employees who are highly compensated.  Examples of these benefits include employee discounts, adoption assistance, and tuition reduction.

Not all benefits have to be paid for solely by the employer and some of the shared cost may result in paycheck deductions. Understanding the tax implications of your fringe benefits helps you to make wise decisions so that you can give your employees the perks that will make them feel valued and that fit into your budget.

If you’d like help in understanding benefits reported and paid through payroll, contact The Payroll Department.  Making well-informed benefit decisions is a great way to ensure that you have a happier workplace as well as a more productive one.

-Jessica of The Payroll Department Blog Team