When it comes to perks at work, things like unlimited snacks, concert tickets, or birthday celebrations are a great way to make your employees feel appreciated. But knowing which perks to treat as benefits deductions, and understanding the difference between how the IRS views work perks as taxable fringe benefits—and when you can just enjoy giving rewards tax-free—is an important distinction to make.
Please note that we aren’t tax experts, and we can’t tell you how to do your taxes, (sorry), but what we can do is provide a comprehensive guide to benefits deductions.
With that said, here’s what we know.
What are fringe benefits?
The IRS defines fringe benefits as “pay that an employer gives an employee for performing services”. Fringe benefits are usually taxable unless the law specifically excludes the benefits from taxability.
Luckily, the IRS has taken it upon themselves to outline the specifics of how to calculate fringe benefits, but if you’d rather watch paint dry than sift through pages and pages of tax info, we’ve got your back!
According to recent numbers from the Bureau of Labor Statistics, employee benefits account for nearly 32% of the total cost of compensating employees. Benefits can include everything from health insurance, paid time off, and retirement savings to flexible work hours, standing desks, unlimited coffee & snacks, and more. The tricky part is understanding whether the fringe benefits you have in place at your company are taxable or not.
Are fringe benefits taxable?
As we noted earlier, any benefit provided by an employer to its employees is taxable unless the law specifically excludes it.
The list of exclusions appears in IRS Publication 15-B and includes:
- Accident and health benefits
- Achievement awards
- Adoption assistance
- Athletic facilities
- De minimus benefits (more on that below)
- Dependent care assistance
- Educational assistance
- Employee discounts
- Employee stock options
- Employer-provided cell phones
- Group-term life insurance coverage
- Health savings accounts
- Lodging on business premises
- No additional cost services
- Retirement planning services
- Transportation (commuting benefits)
- Tuition reduction
- Working condition benefits
To clarify: The perks shown above are benefits that do not have to be included in an employee’s taxable income.
Define your perk: is it “de minimus”?
Not to throw some hefty tax lingo at you, but a de minimus fringe benefit simply means “any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administratively impractical”.
For example, things like receiving flowers on your birthday, free coffee, snacks in the break room, or giving everyone a cool branded company mug are all considered to be “de minimus” fringe benefits.
When in doubt, ask yourself: Is this benefit low-cost and used only on special occasions? If the answer is yes, you’re likely dealing with a de minimus fringe benefit and, therefore, it’s not taxable. Things like cash or a gift exceeding $100 cannot be considered as a de minimus fringe benefit. So, something like tickets to a Beyonce concert given away at a raffle has to count as income. Who run the world? — Apparently, taxes.
So, what about catered lunches?
Hey, here’s some good news: Even though lunches are not considered a fringe benefit, on-site meals are 100% tax-deductible. The lunch just has to be in-office and for your team’s convenience. While the “in-office” part is pretty easy to figure out, the rules around convenience are pretty vague—and that works in your favor. 🎉
Some other awesome, fully deductible food and entertainment expenses include:
- A company-wide holiday party
- Food and drinks provided free of charge for the public
- Food included as taxable compensation to employees and included on the W-2
Tax treatment of wellness programs
Unfortunately, for the fitness enthusiasts out there, the tax treatment of wellness programs is clear. Wellness programs are considered income, therefore, it’s taxable.
The good news is, there might be some wiggle room for on-site fitness classes like yoga or boot camp, but the rules are vague. But hey, no one is putting a tax on breaking a sweat during an intense round of ping pong, am I right?
How fringe benefits are taxed
The value of fringe benefits should be calculated by January 31st of the following year in order to withhold and deposit payroll taxes.
To determine the value of most fringe benefits deductions, use valuation rule. Under this rule, the value of a fringe benefit is its fair market value, and for many fringe benefits, this can be applied easily.
Let’s say you give an employee a $50 gift card to Wendys (Frosty, anyone?). The value of the gift is $50 at fair market value—easy peezy. On the other hand, if you give an employee a company vehicle for personal use, you can figure out the value by multiplying the standard mileage rate by the total miles driven for personal use. From here, withhold payroll taxes on this amount and include it in taxable wages on the employee’s W-2 at the end of the year.
What about expense reimbursements?
If your employees spend their own money on work-related expenses like travel, work supplies, or client entertainment, and then request a reimbursement from you as the employer, you might be wondering if those reimbursements are included in your employees’ taxable income.
If your company has an accountable plan, that complies with IRS regulations. In order to be considered an “accountable plan” your arrangement must include the following:
- There must be a business connection.
- The employee must adequately account to the employer.
- The employer must require the return of excess reimbursements.
Let us explain.
There must be a business connection: This means the expense must be incurred while performing services as an employee. Steak dinner to impress your clients? Covered. Chinese food while watching TV at home and “looking over reports”? Not so much.
The employee must adequately account to the employer: Let’s see those receipts. An employee has to provide receipts that report the date, time, and value of the expense and in some cases, like hotel bills, your receipt must be itemized.
The employer must require the return of excess reimbursements: Within a reasonable amount of time, the employee must return any excess expenses or these amounts must be included and reflected in their income.
In a nutshell, if you give an employee $800 to cover work expenses, and you don’t ask them to submit expense reports with accountability information, then that $800 is taxable income. But, if that employee keeps up with their receipts and provides reimbursement information, it’s not taxable income.
Fringe benefits are perks and additions to an already stellar compensation package. And with 53% of employees today saying fringe benefits increase their quality of life, throwing in some extra perks will give your company an edge in an increasingly competitive job market.
And when it comes to fringe benefits deductions, handling them should be (fairly) simple. It’s the employer’s responsibility to calculate which fringe benefits are included in an employee’s taxable income, along with what information should be included in their W-2, but when in doubt, you can refer to the IRS’s taxable benefit guide.
Speaking of fringe benefits, we know those pretty well. Reach out to chat more about how Zestful can help streamline the tax process and eliminate the reimbursement process along the way.