Fringe Benefits: An Employer’s Guide & Examples

For this exclusion, a highly compensated employee for 2023 is an employee who meets either of the following tests. If the cost of awards given to an employee is more than your allowable deduction, include in the employee’s wages the larger of the following amounts. See Table 2-1 for an overview of the employment tax treatment of these benefits. A highly compensated employee for this purpose is any of the following employees.

  1. Don’t post your SSN or other confidential information on social media sites.
  2. The bank furnishes Frank’s lunch without charge in a cafeteria the bank maintains on its premises.
  3. Also, see the special rules for certain demonstrator cars and qualified nonpersonal use vehicles discussed later.
  4. The employee must meet any substantiation requirements that apply to the deduction.

You’re considered to incur substantial additional costs if you or your employees spend a substantial amount of time in providing the service, even if the time spent would otherwise be idle or if the services are provided outside normal business hours. For this purpose, your revenue from providing a meal is considered equal to the facility’s direct operating costs to provide that meal if its value can be excluded from an employee’s wages, as explained under Meals on Your Business Premises, later. If you provide free or discounted meals to volunteers at a hospital and you can reasonably determine the number of meals you provide, then you may disregard these costs and revenues. If you charge nonemployees a greater amount than employees, then you must disregard all costs and revenues attributable to these nonemployees. This exclusion applies to a price reduction you give your employee on property or services you offer to customers in the ordinary course of the line of business in which 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.


For example, the Tax Cuts and Jobs Act suspended qualified moving expense reimbursements from employee’s income for tax years beginning after 2017 and before 2026. Employees who receive valuable fringe benefits often exhibit higher job satisfaction, leading to increased productivity and a positive work environment. If you operate in a highly competitive industry where a skilled workforce is in high demand, offering an innovative and useful fringe benefits package can be the key to attracting strong talent. If you do not have enough HCM capabilities in-house, a Professional Employer Organization (PEO) can help manage fringe benefits for your employees. For example, working condition benefits are taxable to the extent that they are for personal use. If an employee is given a laptop, the taxable income would be the percentage of the laptop’s fair market value that is devoted to personal use.

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The DBA contains an illustrative list of bona fide fringe benefits, which includes, for instance, medical care, compensation for injuries or illness, and pensions for retirement or death, as well as insurance to provide such items. Most fringe benefits are taxable at fair market value but some benefits, such as health and life insurance, are nontaxable. As an employer you can choose to estimate total annual taxes payable by the employee and distribute it over every paycheck. A cafeteria plan refers to a suite of fringe benefits offered by a company that allows employees to choose among them. Often these benefits will come out of pre-tax dollars and can include insurance plans, retirement benefits, and so on. The name cafeteria is used because it is akin to a menu of benefits that can be selected or passed over, such as at a cafeteria buffet.

So, the benefits are excluded from some or all taxes, including federal income, Social Security, and Medicare taxes. The DBRA require payment of prevailing wages to laborers and mechanics working on federally funded or assisted construction projects. The DBRA “prevailing wage” is the combination of the basic hourly rate (BHR) and any fringe benefits for the applicable classification listed in a DBRA wage determination. Prevailing wages, including fringe benefits, must be paid on all hours worked on the site of the work. Nontaxable fringe benefits aren’t subject to income tax, Social Security and Medicare tax, or federal unemployment tax. For example, adoption assistance is exempt from income tax but is taxable for federal unemployment and Social Security and Medicare.

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Any fringe benefit you provide is taxable and must be included in the recipient’s pay unless the law specifically excludes it. Section 2 discusses the exclusions that apply to certain fringe benefits. Any benefit not excluded under the rules discussed in section 2 is taxable. Some fringe benefits are not part of a worker’s taxable compensation. That means the benefits might not be subject to federal income tax withholding, FICA, and FUTA tax. And, calculate and withhold Social Security and Medicare taxes on the total compensation after adding the value to the employee’s wages.

Report the uncollected amounts separately in box 12 of Form W-2 using codes “M” and “N.” See the General Instructions for Forms W-2 and W-3 and the instructions for your employment tax return. For employment tax and withholding purposes, you can treat taxable noncash fringe benefits (including personal use of employer-provided highway motor vehicles) as paid on a pay period, quarter, semiannual, annual, or other basis. But the benefits must be treated as paid no less frequently than annually. You can withhold more frequently for some employees than for others. You can generally exclude the cost of up to $50,000 of group-term life insurance coverage from the wages of an insured employee. You can exclude the same amount from the employee’s wages when figuring social security and Medicare taxes.

You can generally exclude the value of achievement awards you give to an employee from the employee’s wages if their cost isn’t more than the amount you can deduct as a business expense for the year. The excludable annual amount is $1,600 ($400 for awards fringepay that aren’t “qualified plan awards”). 535 for more information about the limit on deductions for employee achievement awards. You’re an eligible employer if you employed an average of 100 or fewer employees during either of the 2 preceding years.

Generally, life insurance isn’t group-term life insurance unless you provide it at some time during the calendar year to at least 10 full-time employees. This exclusion applies to life insurance coverage that meets all the following conditions. You can’t exclude from an employee’s wages the value of a cell phone provided to promote goodwill of an employee, to attract a prospective employee, or as a means of providing additional compensation to an employee. You can’t exclude from the wages of a highly compensated employee any part of the value of a discount that isn’t available on the same terms to one of the following groups.

Find out how you can start offering benefits or increase the benefits you offer by talking to a financial advisor or accountant that works with businesses. The Society of Human Resources Management (SHRM) provides a sample survey that covers a variety of topics, such as health benefits, time off, retirement plans and more. While many exemptions exist, there are some rules that are in place. For instance, retirement planning services are exempt but that’s not the case for tax preparation, accounting, legal or brokerage services. Fringe benefits are a way to compensate employees in addition to wages or a salary.

Each annual lease value in the table includes the value of maintenance and insurance for the automobile. Don’t reduce the annual lease value by the value of any of these services that you didn’t provide. For example, don’t reduce the annual lease value by the value of a maintenance service contract or insurance you didn’t provide.

Additionally, the tax treatment of fringe benefits can be complex and may vary depending on various factors, such as the size of your employer and the specific benefit in question. With a cafeteria plan, employees can allocate a certain amount of money towards the benefits they want and can also choose to decline certain benefits if they don’t need them. This is particularly appealing to employees who have specific needs or preferences, such as those who require more comprehensive health insurance or those who prefer to have more retirement savings options. Fringe benefits tax (FBT) is a tax on most, but not all non-cash employee benefits an employer might provide to an employee.

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