All About Fringe Benefits and Taxes
The IRS defines fringe benefits as “a form of pay (including property, services, cash or cash equivalent) in addition to stated pay for the performance of services.”
They include:
- Medical, dental and vision insurance.
- Disability insurance.
- Life insurance.
- 401(k) matching.
- Paid holidays.
- Paid vacation, sick and/or personal time off.
- Wellness programs.
- Transportation benefits.
- Pet insurance.
- Stock options.
- Achievement awards.
- Tuition assistance.
- Student loan assistance.
- Home down-payment assistance.
- Adoption assistance.
- Dependent care assistance.
- Employer-provided vehicle and cellphone.
- Employee gifts and discounts.
- Tickets to entertainment events.
- Lodging and meals.
- Year-end bonuses.
Fringe benefits can be offered not just to employees but also to independent contractors and business partners. Further, they’re governed by an array of laws that dictate how they should be implemented and administered.
One of the most critical laws surrounds taxation. According to the IRS, fringe benefits are taxable and must be included in employees’ gross wages unless excluded by law.
For example, the following fringe benefits are excluded entirely or up to a certain point from federal withholding taxes if provided to employees under a cafeteria, or Section 125, plan:
- Medical insurance.
- Dental insurance.
- Vision insurance.
- Adoption assistance.
- Health savings accounts.
- Dependent care assistance.
As indicated, some fringe benefits are fully nontaxable; others are nontaxable up to a certain dollar limit. In addition, some are tax deferred — meaning they are not taxable when the contribution is made but are subject to taxation later.
Note that a benefit doesn’t have to be part of a cafeteria plan in order to be deemed nontaxable to employees. For example, expense reimbursements made under an accountable plan and transportation benefits that meet the regulations of Section 132(f) of the Internal Revenue Code are nontaxable.
Also, not all nontaxable fringe benefits are excluded from the same tax. For example, one benefit may be exempt from all federal employment taxes while another may be exempt from only one federal employment tax.
If the benefit is taxable, it must be withheld from the employee’s wages and reported on Form W-2. For fringe benefits offered to business partners who are not employees and independent contractors, no taxes should be withheld; however, the benefits should be reported to the IRS using Form 1065 for business partners and Form 1099-MISC for independent contractors.
To learn more about the taxability of fringe benefits under federal law, read IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits. Also, consult state law for its rules on fringe benefits taxation.
Fringe benefits have become a virtual necessity for employers. A survey published by the American Institute of CPAs found that 80% of workers would “choose a job with benefits over an identical job that offered 30 percent more salary but no benefits.” So, if you’re not offering fringe benefits, you may want to get started.
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