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The tax code allows employers to provide employees with various tax-free fringe benefits. Not all employers will offer all, or even some, possible fringe benefits. But you should check with your employer to see what fringe benefits are available and which ones you might benefit from.
A fringe benefit is a form of pay (including property, services, cash, or cash equivalent) in addition to stated pay for the performance of services. Under Internal Revenue Code (IRC) Section 61, all income is taxable unless an exclusion applies. Some forms of additional compensation are designated explicitly as "fringe benefits" in the IRC; others, such as moving expenses or awards, are addressed by statutory provisions providing special tax treatment but are not designated as fringe benefits by the IRC. This article broadly uses the term "fringe benefit" to refer to all remuneration other than stated pay for which special tax treatment is available. Fringe benefits for employees are taxable wages unless expressly excluded by the tax code.
Employer contributions to retirement plans are certainly among the most significant benefits employees may receive, but this is a separate topic not discussed in this article.
The tax rules related to tax-excludable fringe benefits and reimbursements are often complex. This article only provides an overview. Please get in touch with this office for further details.
Qualified Transportation Fringe Benefits (QTFB) – These benefits include the cost of:
Commuter transportation in a commuter highway vehicle
Transit passes
Qualified parking
Employers may simultaneously provide an employee with one or more of these benefits. To the extent the fair market value (FMV) of these benefits does not exceed monthly excludable limits, adjusted annually for inflation, the benefits are excluded from the employee's income, i.e., they are tax-free for the employee. The 2024 tax-free QTFBs are limited to $315 per month (combined for the commuter highway vehicle and transit pass exclusions). The monthly limit was $300 in 2023). Any reimbursement exceeding the monthly limit would be included as taxable income by the employer.
Group Term Life Insurance (GTLI) - The cost of the first $50,000 of GTLI coverage provided by an employer is excluded from an employee's taxable income. Generally, life insurance is only group-term life insurance if it is delivered to at least ten full-time employees at some time during the calendar year.
The cost of employer-paid group term coverage exceeding $50,000 is treated as taxable income and added to the employee's W-2. The cost and taxable amount are based on the IRS table illustrated below. This amount may be higher than the employer pays for the insurance, creating phantom income.
For older employees, the after-tax cost of the additional coverage frequently exceeds the cost for an individual term policy. It may be appropriate for certain employees to utilize the first $50,000 in coverage and acquire an individual policy for any additional needed coverage.
Accident and Health Benefits - This income exclusion applies to contributions an employer makes to an accident or health plan for an employee, including the following:
Contributions to accident or health insurance costs, including qualified long-term care insurance.
Contributions to a separate trust or fund that, directly or through insurance, provides accident or health benefits.
Contributions to Archer MSAs or health savings accounts (HSAs).
This exclusion also applies to payments the employer directly or indirectly makes to an employee under an accident or health plan for employees that are either of the following.
Payments or reimbursements of medical expenses.
Payments for specific permanent injuries (such as the loss of the use of an arm or leg). The payments must be figured without regard to the period the employee is absent from work.
An accident or health plan is an arrangement that provides benefits for employees, their spouses, their dependents, and their children (under age 27 at the end of the tax year) in the event of personal injury or sickness. The plan may be insured or noninsured and doesn't need to be in writing.
An employee for this exclusion can be a current common-law employee, a full-time life insurance agent who is a current statutory employee, a retired employee, a former employee the employer maintains coverage for based on the employment relationship, a widow or widower of an individual who died while an employee, or a widow or widower of a retired employee.
Flexible Spending Arrangement - Under a written employer plan (sometimes termed a cafeteria plan), the employee may choose to reduce salary and contribute to an account for medical expenses on a pre-tax basis. Maximum contribution for 2024 is $3,200. Amounts in the account may be used to pay for qualifying medical expenses, generally copays, medication, and other out-of-pocket medical expenses. The contributed amount must typically be used in the year of the contribution, or the employee forfeits any balance. However, in recent years, there has been a grace period of 2½ months after the plan year's end to spend an inflation-adjusted carryover amount of $640 for 2024.
Exclusion for Qualified Employee Discounts – This exclusion applies to a price reduction an employer offers to an employee on property or services the employer provides customers in the ordinary course of the line of business where the employee performs substantial services. It applies whether the property or service is provided at no charge (in which case only part of the discount may be excludable as a qualified employee discount) or at a reduced price. It also applies if the benefit is provided through a partial or total cash rebate.
However, there is a limit on the discount amount that can be provided to an employee. An employer can generally exclude the value of an employee discount from the employee's wages up to the following limits:
For a discount on services, 20% of the price the employer charges nonemployee customers for the service.
For a discount on merchandise or other property, the employer's gross profit percentage is multiplied by the price the employer charges non-employee customers for the property.
For the exclusion to apply, the employee must provide substantial services in the employer's line of business in which the employer offers the property or services in question to nonemployee customers. The exclusion does not apply to highly compensated employees if the qualified employee discounts are available on a discriminatory basis.
Dependent Care Assistance Program (DCAP) - This exclusion applies to household and dependent care services the employer directly or indirectly pays for or provides to an employee under a written dependent care assistance program (DCAP) that covers only the employer's employees. The services must be for a qualifying person's care and must be provided to allow the employee to work. These requirements are the same as the tests the employee would have to meet to claim the dependent care credit if the employee paid for the services.
For this exclusion, the following individuals are treated as employees:
A current employee.
A leased employee who has provided services to the employer substantially full-time for at least a year if the services are performed under the employer's primary direction or control.
The employer is a sole proprietor.
A partner who performs services for a partnership.
The employer can exclude the value of benefits provided to an employee under a DCAP from the employee's wages, provided it is reasonable to believe that the employee can exclude the benefits from gross income. An employee can generally exclude from gross income up to $5,000 ($2,500 if married filing separately) of benefits received under a DCAP each year. However, the exclusion can't be more than the smaller earned income of the employee or spouse.
An employer can only exclude dependent care assistance from the wages of a highly compensated employee if the benefits provided under the program don't favor highly compensated employees. For this exclusion, a highly compensated employee for 2024 is an employee who meets either of the following tests.
The employee was a 5% owner at any time during the year or the preceding year.
The employee received over $155,000 for the preceding year. This test can be ignored if the employee wasn't in the top 20% of employees when ranked by pay for the prior year.
Adoption Assistance - An adoption assistance program is an employer's separate written plan that meets all the following requirements.
It benefits employees who qualify under the employer's rules, which don't favor highly compensated employees or their dependents. The dependent care assistance program defines a highly compensated employee.
It doesn't pay more than 5% of its annual payments to shareholders, owners (or their spouses or dependents).
The employer gives reasonable notice of the plan to eligible employees.
The employee provides reasonable substantiation that payments or reimbursements are for qualifying expenses.
The employer must exclude all payments or reimbursements made under an adoption assistance program for an employee's qualified adoption expenses from the employee's wages subject to federal income tax withholding. However, the exclusion does not apply to wages subject to social security, Medicare, and FUTA taxes. The maximum exclusion for 2024 is $16,810.
Qualified Educational Assistance - Under an educational assistance plan, an employer may exclude up to $5,250 paid or incurred on behalf of an employer from each employee's wages if specific requirements are met. The education may be at the undergraduate or graduate level and is not required to be job-related.
The following requirements apply for a qualified educational assistance plan:
The employer must have a written plan.
The plan may not offer other benefits that can be selected instead of education.
Assistance does not exceed $5,250 per calendar year for all employers of the employee combined.
The plan must not discriminate in favor of highly compensated employees (generally, for 2024, those receiving $155,000 or more).
Eligible employees include current and laid-off workers, retirees, and disabled individuals, as well as specific self-employed individuals. Employees' spouses or dependents are not eligible.
Educational expenses include tuition, books, supplies, and equipment necessary for class. Educational expenses do not include tools or supplies that the employee may keep after the course is completed, education involving sports, games, hobbies unless job-related, meals, lodging, or transportation.
Student Loan Payment – Until 2025, an employer may treat student loan payments – principal, interest, or both – as qualifying for the $5,250 exclusion.
If the employer doesn't have an educational assistance plan or provides an employee with assistance exceeding $5,250, the employer must include the value of the benefits as wages.
Working Condition Educational Assistance - Job-related educational expenses may be excludable from an employee's income as a working condition fringe benefit, which is an excludable benefit of property or services provided by an employer to an employee so that the employee can perform their job (work-related). It applies to the extent to which the property or services would be allowable as a business expense to the employee if the employee had paid for it. The exclusion is generally available for educational instruction or training that maintains or improves an employee's job-related capabilities or meets the employer's express requirements or applicable laws or regulations.
To be excludable, the educational course must not:
Be needed to meet the minimum educational requirements of the current job or
Qualify the employee for a new trade or business.
The following is a general guide to an employee qualifying for Working Condition Educational Assistance:
Qualified expenses include books, equipment, fees, supplies, and tuition. However, these expenses only include the cost of a course or other education involving sports, games, or hobbies if the education has a reasonable relationship to the employer's business or is required as part of a degree program.
Education expenses include tools or supplies (other than textbooks) that the employee can keep at the course's end, including lodging, meals, or transportation. The employee must substantiate to the employer that the educational assistance provided was used for qualifying education expenses.
An educational assistance program is a separate written plan that provides educational assistance only to an employer's employees. The program qualifies only if it meets all the following tests.
The program benefits employees who qualify under rules set up by the employer that don't favor highly compensated employees.
The program doesn't provide more than 5% of its benefits for shareholders or owners (or their spouses or dependents) during the year. For this purpose, a shareholder or owner owns (on any day of the year) more than 5% of the stock or the capital or profits interest of the business.
The program doesn't allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance.
The employer gives reasonable notice of the program to eligible employees.
Travel Expenses - Reimbursements received by employees who travel on business outside the area of their tax home may be excluded from wages. Qualifying travel expenses are excludable if they are incurred for temporary travel on business away from the general area of the employee's tax home. To be excludable from wages, the travel must be substantially longer than an ordinary day's work and require an overnight stay or substantial sleep or rest.
Travel expense reimbursements may include:
Costs to travel to and from the business destination.
Transportation costs while at the business destination.
Lodging, meals, and incidental expenses.
Cleaning, laundry, and other miscellaneous expenses.
Reimbursements for allowable expenses are excludable from wages if the accountable plan rules are met. The employee must provide the employer with a detailed accounting of the expenses.
Identifying the employee's tax home is critical because the employee must be considered away from their tax home for reimbursements of travel expenses to be excludable. In most cases, the employee's tax home is the general vicinity of their principal place of business.
If a per diem allowance is used, the employee is deemed to have substantiated the amount of expenses equal to the lesser of the federal per diem rate or the per diem allowance paid by the employer.
The per diem allowance must be at or less than federal rates to be fully excludable.
No receipts are required if a per diem allowance is used, but the payments must meet the other substantiation requirements, including date, time, place, and business purpose.
An employer's substantiation requirements must meet the federal requirements at minimum. However, the employer may have more stringent requirements, such as requiring meal receipts.
Generally, the actual documented lodging receipt is required.
Transportation Expenses – Transportation expenses are costs for local business travel not away from the tax home area overnight and in the general vicinity of the principal place of business. Transportation expenses do not include commuting costs, which are not deductible business expenses and cannot be excluded from wages if provided by the employer. To be excluded, reimbursements for transportation expenses must meet the accountable plan requirements.
Moving Expenses – The Tax Cuts and Jobs Act suspends the exclusion for qualified moving expense reimbursements from employees' income for tax years beginning after December 31, 2017, and before January 1, 2026. However, the exclusion is still available for a member of the U.S. Armed Forces on active duty who moves because of a permanent change of station. The exclusion applies only to reimbursement of moving expenses that the member could deduct if they had paid or incurred them without reimbursement.
Reimbursements for Use of Employee-Owned Vehicles – When employees use their vehicles for work-related purposes, an employer can reimburse them through a standard mileage rate allowance instead of actual automobile expenses and meet the accountable plan rules. A standard mileage rate covers all vehicle operating costs, including insurance, maintenance, tires, oil, etc., but does not include parking or toll charges.
Under the tax code, mileage-rate reimbursements for allowable business travel are excludable from the employee's wages if they are equal to or less than the standard federal mileage rate and the employee accounts for the business miles driven.
As of January 1, 2024, the standard mileage rate is 67 cents per mile.
Reimbursements for non-business travel, including commuting, are always taxable even if paid at or below the federal mileage rate and are to be included in regular wages and subject to all income and employment taxes.
Commuting between an employee's residence and their principal place of business is considered non-business travel or personal use.
Reimbursements over the federal mileage rate are taxable as regular wages to the employee.
Employer-Provided Vehicles - If an employer provides a vehicle that an employee uses exclusively for business purposes and the substantiation requirements are met, there are no tax consequences to the employee, and no reporting by the employee is required for that use. The use is treated as a working condition fringe benefit. Business use does not include commuting. Employees should maintain records to substantiate that all vehicle use was for business.
Substantiated business use is not taxable to the employee if an employer-provided vehicle is used for business and personal purposes. Personal use is taxable to the employee as wages. The employer can include all use as wages; in this case, the employee may reimburse the employer for personal use rather than treating it as wages.
Awards and Prizes - Unless specifically excluded, prizes or awards given to employees are generally taxable. Cash awards to employees are always taxable. Generally, the value of an award or prize given by an employer is taxable to an employee as wages. If the employer pays the employee's share of taxes on an award, the taxes paid are additional wages to the employee. Three types of non-cash awards may be excluded from income:
Certain employee achievement awards,
Certain prizes or awards are transferred to charities, and
De minimis awards and prize
The maximum amount of excludable awards to a single employee during a calendar year is limited to:
$400 for awards made under a nonqualified plan, or
$1,600 for awards made under qualified and nonqualified plans.
Certain prizes and awards for charitable, scientific, artistic, or educational achievement are not taxable if the recipient transfers them to a charitable organization.
A prize or award, not cash or cash equivalent, of nominal value and provided infrequently is excludable from an employee's wages. Prizes or awards given frequently to an employee do not qualify as an excludable de minimis award, even if each award is small in value.
Examples of excludable de minimis awards:
Nominal gifts for birthdays, holidays
Holiday turkey and hams
Flowers, plaques, and coffee mugs for special occasions
Gold watch on retirement.
Parking for employee of the month if the value is less than $315 per month for 2024.
Professional Licenses and Dues - Employer reimbursements to employees for the cost of their professional licenses and professional organization dues may be excludable if they are directly related to the employee's job.
If you are an employer seeking additional information about a fringe benefit or an employee wanting additional information related to the taxation of your employer's fringe benefits, please get in touch with this office for assistance.
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