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This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma Tax®.
If you love your job, at least part of the reason for your happiness at work might have something to do with the fringe benefits you get.
The IRS defines “fringe benefits” as pay that an employer gives an employee for performing services. Fringe benefits are generally taxable unless the law specifically excludes the benefit from taxability.
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 leave and retirement savings to flexible work arrangements, standing desks, coffee and doughnuts, and more. The tricky part is understanding whether fringe benefits are taxable.
- Are fringe benefits taxable?
- How are fringe benefits taxed?
- Are expense reimbursements taxable income?
- What impact did tax reform have on fringe benefits?
Are fringe benefits taxable?
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 minimis benefits
- 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
These are benefits that your employer doesn’t have to include in your taxable income.
Defining “de minimis”
You might be familiar with many of the benefits included in the list above. But unless you deal with human resources and employee benefits as part of your job, the term “de minimis benefits” might not be familiar.
The IRS defines de minimis fringe benefits as “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.”
This includes things like occasionally using the office copy machine for personal use, receiving flowers on your birthday or another special occasion, free coffee, doughnuts and soft drinks in the break room, or giving everyone a T-shirt with the company logo on it.
How are fringe benefits taxed?
If your employer provides taxable fringe benefits, the value of those benefits should be determined before January 31 of the following year so that your employer can withhold and deposit payroll taxes.
The value of those benefits is determined using the general valuation rule, which is basically the fair market value of the fringe benefit. For many fringe benefits, this is easy.
For example, if your employer gives you a $50 gift card, the value of the gift is $50 — and that’s the fair market value. If your employer gives you a company vehicle for personal use, they can figure out the value by multiplying the standard mileage rate (54.5 cents per mile for 2018) by the total miles driven for personal use. They should withhold payroll taxes on this amount and include it in taxable wages on your W-2 at year end.
Your employer can add the value of your fringe benefits to your regular wages and apply your ordinary withholding rate to the total, or they can withhold federal income tax at a flat rate of 25%.
What’s the difference between a W-2 and a W-4?
The W-4 is a form that employees fill out and employers use to help determine federal tax withholdings throughout the year. It’s information that’s important prior to or during a tax year.
The W-2 is a form that employers send to employees who made at least $600 during the year or for whom they withheld income, Social Security or Medicare tax, regardless of the amount earned. You should receive a W-2 after a tax year and use the information listed when you file that year’s return.
Are expense reimbursements taxable income?
Often, employees spend their own money on business-related expenses and request reimbursement from the employer by completing an expense report. These expenses might happen when you travel for work, buy work tools and supplies, or entertain clients. In these situations, you may wonder whether those reimbursements will be included in your taxable income.
Expense reimbursements don’t have to be included in your wages if your employer has an “accountable” plan that has these three requirements for reimbursing expenses:
- Business purpose: You must incur the expense while performing your services as an employee.
- Substantiation: You must substantiate your expenses by providing your employer with evidence of the amount, time, place and business purpose of the expense. You must also submit business expenses within a reasonable time period after they occurred. A monthly expense report with receipts attached fulfills this requirement.
- Returning excess amounts: If your employer gives you more money than you spend on business expenses, you must return any excess funds to your employer within a reasonable period of time.
Simply put, if your employer gives you a monthly allowance of $500 to cover expenses like work meals and travel, and does not ask you to submit receipts or return any excess funds, then that $500 would be taxable income. But if your employer requires you to submit receipts for work expenses and return any unused funds, then your expense reimbursements are not taxable income.
What impact did tax reform have on fringe benefits?
The Tax Cuts and Jobs Act eliminated the tax breaks for some fringe benefits. As of Jan. 1, 2018, your employer must treat as taxable income some fringe benefits that used to be tax-free, including …
- Moving expenses: The TCJA removed the provision for tax-free reimbursements of moving expenses, unless the employee is a member of the U.S. armed services on active duty.
- Employee achievement awards: Before Jan. 1, 2018, an employer could recognize employees by providing tax-free achievement awards in the form of cash, gift certificates, vacations or stock options. These must now be included in the employee’s taxable income, though gifts of tangible personal property (like a watch) can still be excluded.
- Bicycle commuting expenses: Employers can no longer give employees tax-free reimbursements for commuting on a bicycle.
From an employee’s perspective, handling fringe benefits should be simple. Your employer is responsible for figuring out which fringe benefits to include in taxable income, how much tax to withhold on those amounts and what info needs to go in your W-2. Still, if you think your employer is providing taxable fringe benefits but not withholding or reporting them properly, it’s a good idea to ask your employer about it.
An employer might not be aware that the fringe benefits they provide to attract and retain their star employees have tax consequences. If an employer errs and excludes a benefit from your income that the IRS says should be taxable, that nice perk could become a problem for both you and your employer.
Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.