Tax Free Employee Fringe Benefits

How Using Compt Can Help With The Tax Side Of Perks

Fringe benefits tax and not-for-profits

Unless managing taxes on a spreadsheet is one of your favorite parts of fringe benefits, youll likely want a software to automate the taxes for you. Without one, expect to spend a lot of time distinguishing between taxable and nontaxable fringe benefits that your employees are using.

At Compt, our perk stipend software has IRS tax compliance built-in. You only have to decide who covers the taxes and we handle the rest. Easy peasy, lemon squeezy.

Compt is the #1 employee stipends platform that gives your people the freedom to choose the lifestyle perks that are best for them and their always evolving needs, even when remote. Interested in learning how Compt might benefit your company? Consult with our team or request a demo.

Value The Fringe Benefits

In many cases, valuing a fringe benefit is simple because its fair market value is the same as its cost. For example, if you pay a $1,000 cash bonus to an employee, the value is $1,000. But some fringe benefits are a little tougher to value. Fortunately, the IRS provides guidelines for valuing many common fringe benefits in Publication 5137, Fringe Benefit Guide.

Employer-provided vehicles are one example. If you provide a company car to an employee thatâs used only for business purposes, you donât have to include the use of that vehicle in the employeeâs income. However, if the employee uses the vehicle for both business use and personal use, the personal portion is taxable income. Publication 5137 provides detailed instructions on the three acceptable methods for valuing those miles.

Find Out Which Job Fringe Benefits Are Tax Free

If you and/or your spouse is employed, the salary, bonus, and any other pay you receive from your employer is income on which you must pay tax. These taxes consist of federal income tax, your employee’s share of Social Security and Medicare taxes, and, in most states, state income tax.

Wouldn’t it be great if employees could avoid paying taxes on at least part of their pay? Well guess what, they can.

There is one big exception to the rule that you have to pay tax on anything your employer gives you as payment for your services: You don’t pay any taxes on the value of certain tax qualified fringe benefits your employer provides. These fringe benefits can include such things as health insurance, medical expense reimbursements, dental insurance, education assistance, and day care assistance.

When we say tax free, we mean it: Tax qualified benefits are totally free of federal and state income tax, and Social Security and Medicare taxes. These tax savings can make employee fringe benefits so attractive that in many cases you’d be better off forgoing part of your salary to obtain them.

Of course, you won’t be better off if you contribute part of your salary to obtain an employee benefit you don’t really want or need. But there are plenty of benefits that most people do want, probably including you.

Tax-free employee fringe benefits include:

What If A Perk Is A Gift

The good news: Gifts arent subject to income tax. The not-so-good news: The general rule is that an employer cannot make a gift, as its almost always considered compensation. This is true even if the gift is not from the company but from the owner of the company. For example, if I gave my paralegal a car, the IRS would typically consider that compensation, even if it didnt come from my law firm. The idea is that our relationship is tied to the employment relationship.

The Supreme Court has generally confirmed this treatment, ruling in Commissioner v. Duberstein that a tax-free gift must be made through detached and disinterested generosity, or out of affection, respect, admiration, charity or like impulses. In Larsen v. Commissioner, the court ruled that a payment was motivated by business exigencies and therefore, not a tax-free gift.

Accident & Health Benefits

What it is: Self-insured plans that do not favor highly compensated employees. Includes medical care reimbursement plans.

Whos exempt from income tax withholding: Most employees, with the exception of greater than 2% shareholders of an S-corporation, provided that the benefit does not discriminate in favor of highly compensated employees.

Also Check: When Do Social Security Benefits Become Taxable

Moving And Relocation Expenses

Effective Jan. 1, 2018 due to the passage of the Tax Cuts and Jobs Act, all expenses paid directly to an employee or to a third party to assist with moving personal items and relocation of the employee and family members are considered taxable. Departments may provide this benefit if approved by the dean or vice president, or their designee, in a formal offer letter or other form of written notice to the employee.

The recommended method for providing the benefit is a lump sum payment made directly to the employee. Departmental personnel may process the payment in Workday via Request One-Time Payment for Relocation or Relocation Gross-Up. The offer letter or other written notice must be attached to the One-Time Payment as support. These One-Time Payments route to Payroll Services for approval in Workday.

If a third party vendor is paid directly to provide moving assistance, the amount is taxable to the employee and the payment voucher is reviewed by Accounts Payable. A Taxable Moving Expense fringe benefit will then be provided to Payroll Services to be added to the employees paycheck.

Additional information about moving and relocation expenses is available in the Handbook of Business Procedures, Part 9.1.11.

Where Did Fringe Benefits Come From

The term âfringe benefitâ first came into circulation in the late 1940s as the world returned to regular work after World War II. But fringe benefits date back much further. In the Middle Ages, workers’ compensation sometimes included extra food or old garments.

The first modern fringe benefits came about towards the end of the 19th century when railroad and mining companies began providing company doctors for their employees. Later, during World War II, more employers began to offer health insurance programs to keep workers from going elsewhere. Shortly after this, governments passed new laws to define which benefits should be considered taxable benefits.

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Payments For Tuition For Professional Development And Job

Departments may make payments for employees to take courses at other institutions. If these courses are not otherwise treated as a non-taxable fringe benefit under the rules specified above in “Non-Taxable Fringe Benefits,” they may be non-taxable as a qualified business expense for education. If an expense is qualified, it is not taxable to the employee, if the expense is non-qualified, it is a taxable fringe benefit and must be reported to Payroll tax accounting to ensure appropriate withholding.

To be qualified, an expense must:

Maintain or improve skills required by the individual in the individual’s employment

Must not be a minimum educational requirement for the employee’s position and

Must not qualify the individual for a new trade or business

Education must meet all three requirements to be considered qualified.. Each criteria is evaluated separately. Below is guidance for completing the required analysis. If, after reading the below, the department still has questions, contact the Tax Office at .

Maintain or improve skills required by the individual in the individual’s employment
This criteria merely requires that the educational activity be relevant to the employee’s job duties, and improve or maintain the skills relevant to his/her job.
In general, all education paid for by a UW department for one of its employees should meet this criteria

Minimum educational requirement

Qualification for a new trade or business

Tax Treatment Of Employer

Not-for-profits and fringe benefits tax

Common examples of tax-free benefits are health insurance and paid vacation.

But there is another potential employee fringe benefit: free meals . Free meals not only make your employees happy but keep them on the premises and generally make them more productive.

The deduction for free meals ends in 2026, so now is the time if you want to give this perk to your employees.

However, not all employee meals are a tax-free fringe benefit. To be a tax-free meal,

must be given in-kind ,
on the employers business premises, and
for the convenience of the employer.

The most common way to pass the convenience test is to establish that employees cant get their meals within a reasonable time it means that they would have to go out of their way or wait too long for a meal.

However, nowadays, many people use meal delivery services like Grubhub, DoorDash, and Uber Eats, so its harder for employers to claim that their employees cant get a meal within a reasonable time.

If an employer wants to provide tax-free meals under the not enough time test, they should not allow their employees to use meal delivery services. They should document why meal delivery services are not viable for themfor example, due to disruption or security concerns.

Want to learn more about tax-free fringe benefits? Book Your Free Assessment Here.

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Employee Fringe Benefits Reporting Year

Fringe benefits are taxed and reported on the employees W-2 in the fringe benefit tax reporting year in which they are paid. The UW fringe benefit tax reporting year is from November 1st through October 31st of each year. For example: if a fringe benefit is paid in November 2019 or December 2019, UW will tax and report these on the W-2 for 2020.

Guide To Tax Withholdings For Stipends And Fringe Benefits

Originally published on June 8, 2022. Last updated July 26, 2022.

With a tight labor market caused by a record number of resignations and job openings, employers need to go above and beyond to attract and retain top talent.

Offering competitive employee benefits packages is a great way to attract and retain your employees, with many employers looking to employee stipends and fringe benefits. But, as with any employee benefit, you need to know how to manage these perks, including understanding their taxability.

This article will explain tax withholdings for fringe benefits, whether employee stipends are taxable, and how to administer compliant employee perks.

The content in this article is intended for educational purposes only. You should consult with your legal counsel and tax advisers to determine the proper steps for your organization.

Also Check: Federal Government Employee Retirement Benefits

How Do They Work

Taxable fringe benefits can take on many forms. For example, one of the common forms of fringe benefits is intangible fringe benefits. These include things like using a company car, life or health insurance, and flexible work schedules.

An employer decides which benefits to offer. The employer also decides which benefits to offer to certain employees and which benefits go hand in hand with certain positions. For example, a manager might get a large office, while a regular employee receives a cubicle. Employees in higher ranks may also access better fringe benefits, like parking.

First Things First What’s A Fringe Benefit

FREE GUIDE: Understanding Fringe Benefit Tax

To quote the Internal Revenue Service : “A fringe benefit is a form of pay for the performance of services. For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work.”

Fringe benefits are additional perks given to employees alongside their usual compensation or pay. They might be given to everyone across the board, or reserved for specific groups based on seniority or performance. Some fringe benefits are for work-related costs, while others are geared towards job satisfaction.

One of the great things about fringe benefits is that they can help companies attract and retain employees as they offer something more than just salary. Common fringe benefits include health insurance, employee lunch programs, education stipends, stock options, company cars, home office setup, and wellness perks for employees. Some companies get really creative and offer extras like free haircuts, pet care, beer and cocktail Fridays, or monthly beauty budgets.

The most successful fringe benefits are those that align company and employee values, build empathy, or help educate employees in some way. These benefits become much more valuable than the monetary cost of the benefit. Here are some great examples of fringe benefits in action:

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Can My Employer Pay The Tax Due On My Fringe Benefits

Yes, that payment is sometimes referred to as a gross-up. If I know that my benefit will result in an extra $3,000 in tax, I might negotiate an additional $3,000 as part of my contract. Butand heres the complicated partthe gross-up payment is also taxable. It can easily turn into a hamster wheel, so be sure to do the math.

Who Pays The Taxes

Either the company can choose to cover the taxes or pass the tax on to the employees.

If an employer wishes to cover the taxes, they do so by grossing up. Grossing up means the employer would give the employee money to cover the tax implication of the fringe benefits.

A company can also choose for their employees to cover the taxes themselves. In either scenario, the company must also pay their own payroll taxes on these benefits.

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Making The Most From Taxable Benefits

Nontaxable Fringe Benefits

Now, it might seem counterproductive to offer fringe benefits only to have your employees taxed for them. But, there are ways to make it worth their while. But, you can avoid forcing employees into a higher tax bracket through a tax gross-up. This means that the employer offers the employee the gross amount that theyâll owe in taxes.

Basically, you must estimate how much you think the employee will claim for their fringe benefits annually. Add this amount to the payroll for tax withholding and account for these taxes on the paycheck.

For example, letâs say that you offer an employee around $100 per month in fringe benefits. The payroll system would then account for the additional $100 in income and withhold the right amount of taxes for the employee.

Then, at the end of the financial year, you can adjust this to the actual amount spent. Generally, the actual amount ends up being lower than the estimated amount, so the employee can enjoy a tax credit instead of owing money.

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I Objective & Purpose

To ensure that the University is in compliance with tax laws with respect to taxable fringe benefits provided to university employees. To also provide guidance that informs the university departments and staff of their responsibility to inform the Payroll Office of taxable fringe benefits provided to employees and to facilitate proper withholding and reporting of payroll taxes.

What Are Examples Of Other Kinds Of Fringe Benefits

Easy examples of fringe benefits include paid holidays and paid time off. Other fringe benefits include life and disability insurance, savings accounts like Flexible Spending Accounts and Health Savings Accounts , and retirement benefits such as company 401 plans and stock options.

Fringe benefits can be relatively modest, like free meals, free coffee, cell phones, and gym passes. And that 15% company discount that I used to get when I worked at Gap? Also a fringe benefit.

Fringe benefits can also be substantial, like the use of company cars, vacation spots, and private jets. Corporate housing is also a fringe benefit: I once had a client whose head chef demanded a penthouse apartment in the city as part of his contract. The sky is pretty much the limit.

If Some Fringe Benefits Are Taxable Why Offer Them In The First Place

To start, competition and loyalty. Employees are attracted to companies that provide benefits beyond that of their competitors. And clients and customers like patronizing establishments that treat their employees well. Excellent benefits are generally consideredappropriately or nota sign of a companys financial well-being.

How To Attract Employees With Tax

One way to attract new employees to your organization and retain them is to offer tax-free fringe benefits. There are two nontaxable employee fringe benefits that many employees appreciate: Dependent Care Assistance and Reimbursement of Student Loan Principal and Interest Payments. Employers get a tax deduction when they pay these benefits, but employees do not pay income tax when they receive these benefits. The amounts are also not subject to Social Security or Medicare taxes, a savings for both the employer and the employee.

Wait What Kinds Of Fringe Benefits Are Required By Law

We tend to think of fringe benefits as something extra, provided by your employer on a voluntary basis, but the term really just means over and above your salary. That includes benefits your employer may be required by law to provide.

A good example is the Family and Medical Leave Act, which requires public agencies, public and private elementary and secondary schools, and companies with 50 or more employees to offer weeks of unpaid, job-protected leave per year. Some states and municipalities may require that certain employers provide paid family and medical leave.