The tax implications of fringe benefits

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To compete with larger employers, small business owners may choose to provide their employees with additional benefits in addition to regular pay. These so-called “fringe benefits” can take the form of property, services, cash or some cash equivalent. Offering these benefits can be an effective way to recruit and retain top talent. However, some of these benefits could be taxable.

Benefits subject to tax

In general, fringe benefits are considered taxable unless a specific exception applies in the Internal Revenue Code. This means that both the employer and the employee may be required to pay taxes on the value of the fringe benefits provided. However, the tax treatment of fringe benefits can vary depending on the type of benefit and the circumstances in which it is provided.

Examples of taxable fringe benefits include, but are not limited to:

• Bonuses.
• Athletic club memberships.
• Value of the personal use of an employer-provided vehicle.
• Business frequent-flyer miles converted to cash.
• Group term life insurance provided to employees in excess of $50,000.

Exceptions to the rule

One common exception to the taxable income rule is for de minimis fringe benefits, which are generally considered too minor to be taxed. Examples include occasional snacks and beverages, occasional tickets to entertainment events, small gifts or awards, use of office equipment, non-cash holiday gifts, parties or picnics, and entertainment events where the value of the benefit is considered minimal and offered infrequently.

Dan Gordon, CPA

Another exception to the taxable income rule is for qualified fringe benefits. These are benefits that are provided to an employee as part of a qualified plan, such as a 401(k), a flexible spending account (FSA) or a qualified health plan. These benefits generally are not subject to income tax at the time they are provided, although they may be subject to other taxes, such as Social Security and Medicare taxes.

Company vehicles are another type of fringe benefit that can have tax implications for both the employer and the employee. If an employer provides a company vehicle to an employee, its value generally is considered taxable income for the employee. However, there are some exceptions to this rule. For example, if the vehicle is used exclusively for business purposes, the employee may be able to exclude its value from his or her taxable income.

Reporting the value

It’s important to understand the tax implications of fringe benefits. Employers should be aware of
which benefits are taxable and which are exempt, and they should keep accurate records of the value of the benefits they provide. Employees also should be aware of the tax implications of the benefits they receive, as they may need to report the value of those benefits on their tax returns.
Incorporating fringe benefits into a hiring and retention program can be a great way for employers to source and retain top talent. They are an important part of compensation packages, but will have tax implications for both employers and employees.

By understanding the taxability of different types of fringe benefits, employers can ensure they are providing benefits in a tax-efficient manner, while employees can ensure they are properly reporting the value of their benefits on their tax returns. As with any advice on taxes or taxability of income or expenses, you should check with your certified public accountant (CPA) on your specific situation.

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