Taxability of Fringe Benefits

The topic of fringe benefits has become a source of concern for many working class individuals. If you aren't aware of exactly what a fringe benefit is, the IRS defines a fringe benefit as: "a form of pay (including property, services, cash or cash equivalent) in addition to stated pay for the performance of services". Clear as mud, right? Not really because there are many exceptions, provisions, special tax treatments and other confusing terms when it comes time for your tax return.

For the purposes of this article, we will be discussing fringe benefits given to employees by their employer, rather than independent contractors. The IRS does draw a line between the two circumstances so it is important to note. To make the definition more user friendly, fringe benefits are anything your employer gives you to reward you or make staying on the job more attractive. Items might include paid vacations, company car, gym memberships, housing allowances, child care assistance, medical benefits, 401(k) matching, tuition reimbursement, stock options - you get the idea. These types of perks are also used to lure potential employees and vary from job to job, depending on your pay grade and skills.

Four IRS Designations for Fringe Benefits

1. Taxable - This is usually the section on your W-2 that has your wages including bonuses, commissions and relocation expenses paid that exceed actual costs. To be more clear, anything subject to Social Security and Medicare as well as Federal Withholding.
2. Non-Taxable - Items that are excluded from wages section. An example of this might be stock options, employee discounts or retirement planning services. Also included in non-taxable are low cost items such as meals served at a company meeting or a small gift or award.
3. Partially Taxable - These perks may be taxed after a certain dollar limit is reached.
4. Tax Deferred - This may be a benefit such as your company's 401(k) matching contribution. There are no taxes paid at the time of the contribution but the money will be taxed later when you make retirement withdrawals. 

To determine how to value an item such as the amount of time you use a company vehicle for personal use, you are to use the Fair Market Value or FMV. FMV refers to how much you would pay for the item if you were to buy or lease it on your own, not considering how much the company paid for it as there are often corporate discounts. 

Related Post: Taxable vs. Non-taxable income

There are definitely some gray areas that you may want to discuss with an accountant before assuming they are not taxable. When it comes to the IRS, it is never better to assume anything because you may pay bigger for it later in interest and penalties. Chandler & Knowles CPAs can help you to better understand the tax laws on fringe benefits through our employee benefits services. Call us today to make an appointment: (817) 533-8294.