United States: Taxable And Non‐Taxable Fringe Benefits

Last Updated: July 7 2016
Article by Amber Gutschlag

Do you have to pay taxes on fringe benefits you receive from your employer?  The answer is, "It depends." Figuring out how to differentiate between taxable and non‐taxable fringe benefits can be complex.

Let's start by getting a better understanding of what the IRS considers fringe benefits and how these differ from regular benefits.

What Does "Fringe Benefit" Mean?

"Fringe benefits" is a term the IRS uses to distinguish between the essential compensation you receive from performing the services of your job, and the extra perks you receive from your employer. You may perform services for someone as an employee, or as an independent contractor.

Reporting Taxable Fringe Benefits

Your gross taxable income (compensation) includes anything you receive from your employer in connection with your performance of services.  If you receive a fringe benefit from your employer, it will be taxable to you, unless it is specifically non-taxable per the tax code.  It is important to note that the payment of cash or cash equivalent (i.e. gift card) at any amount is considered compensation and should be taxable income to you.

A few of the most common taxable fringe benefits that must be reported as income are:

  • Performance bonuses
  • Personal, vacation and resort expenses
  • Reimbursements in excess of actual moving expenses
  • Education assistance beyond the allowable IRS exclusion (currently at $5,250/year)

Two notable but lesser known benefits that are taxable are:

  • Cash awards for taking part in wellness programs ‐ Many companies offer wellness programs for no cost to the employees, but still incentivize employees to sign up for these programs. Often companies gain buy‐in by offering tiered rewards, sometimes in cash, in return for achievements or alternative gym   Perks like these should be considered taxable wages according to IRS experts and tax advisors.
  • Wellness program reimbursements ‐ Many companies now allow their employees to make pretax contributions to help fund a wellness The company then reimburses the employees for some or all of those contributions.  This would be another case where the IRS would consider these benefits as additional taxable wages.

Which Fringe Benefits are Non-Taxable?

As noted above, any benefit you receive from your employer is taxable compensation, unless it is specifically excluded by the IRS tax code.  IRS publication 15‐B, "The Employer's Tax Guide to Fringe Benefits", provides many examples of those fringe benefits that may be non-taxable.  The list below contains some of the most common tax‐free benefits that you may encounter:

Tax-exempt benefits may include:

  • Health benefits
  • Performance recognition
  • Dependent care
  • Educational benefits
  • Employee discounts
  • Required business devices
  • Health savings accounts (HSA)
  • De Minimis benefits

Most, if not all, of the excluded benefits are subject to annual limits and additional requirements to be tax-free to the employee.  Your human resources department or accountant should be able to help you determine if a portion of these benefits will be taxable compensation to you.

What is a "De Minimis" Fringe Benefit?

The IRS defines a "de minimis" benefit as any kind of property or service where the value is so small that accounting for it repeatedly across the workforce would be an unreasonable burden or would be impractical from an administrative viewpoint. Examples of de minimis fringe benefits include:

  • Occasional personal calls or use of a company mobile device
  • Occasional use of the company's copy machine
  • Holiday gifts with a low market value*
  • Company picnics
  • Most award meals
  • Sporadic tickets to entertainment events
  • Non‐regular use of company vehicles for short trips

*A gift card of any amount is taxable compensation.

The frequency or intensity of use can convert a de minimis fringe benefit into taxable compensation, unless it is a "working condition" fringe benefit.   Check with your tax accountant where there is uncertainty.

What Qualifies as a "Working Condition" Fringe Benefit?

The IRS allows benefits to be exempt from taxation if the property or service was essential for the employees to do their jobs properly.  If the employee could deduct the cost as a necessary business expense or depreciation expense, then it qualifies as tax‐free.  The IRS gives examples of working condition fringe benefits, such as:

  • Use of a company car for business trip
  • Use of a company‐provided mobile device
  • Job‐related education expenses to train an employee
  • Education assistance beyond the allowable IRS exclusion (currently at $5,250/year)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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