Your Ultimate Guide to Fringe Benefits and Taxable Benefits (US Version)

Emil Aite
July 20, 2022
Your Ultimate Guide to Fringe Benefits and Taxable Benefits (US Version)

Disclaimer: There are some grey areas in guidelines set by the IRS definitions, so it is up to an employer to define what they consider a taxable benefit vs. a non-taxable benefit. We always suggest consulting with your finance or accounting team or tax experts for formal guidance. However, we want to be helpful, so we put this info together from what we've learned from resources published by the IRS.‍

First Things First, What's a Fringe Benefit?

To quote the Internal Revenue Service (IRS): "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.

Companies are also finding ways to use fringe benefits to make a meaningful impact in their employees’ lives. Many now offer family care and support stipends, which go beyond supporting just the employee. These stipends can be used to support family-related costs like babysitting services, birthing preparation classes, and care for aging parents. This kind of family-focused approach to employee support can really make a company stand out and attract engaged, community-minded employees.

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:

  • Hinge, a dating app, offers all employees a $200 monthly date stipend to go on unique dates and build relationships outside the office. Employees try out new date spots, review them, and then share the reviews with Hinge members for date inspiration.
  • Airbnb, a marketplace for travel experiences, offers employees a $2,000 yearly travel stipend to explore the world. Employees get a better understanding of how the service works for hosts and what the customer experience is like while enjoying a fantastic vacation.
  • Shopify, an ecommerce CMS, gives every employee multiple free Shopify accounts and up to $300 per year to invest in their Shopify businesses. It is a great way for employees to experience their own product and build empathy for their customers. As a result 1,000’s of Shopify stores have been created by current and former employees.
  • Hoppier (that's us!), a tool for managing stipends, offers an “anything” monthly stipend that allows employees to set their own stipend rules. Employees get to know the product while having the freedom to make their own decisions about where to spend the funds.
  • You can also find more than 121+ examples of stipends here.

Get creative with your fringe benefits and align them with your team’s needs. You’ll not only have a program that works, but you’ll have employees who buy into your company culture. 

Where Did Fringe Benefits Come From? 

Where did fringe benefits come from?

The term ‘fringe benefit’ 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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What Are Taxable Benefits?

Some fringe benefits are considered taxable benefits and some aren’t. It helps to know which are classified as taxable to make things easier when income tax return season hits.

A taxable benefit is a fringe benefit that is perceived and taxed as an employee's income. For example, if you give your employees a gift card, lawnmower, car service or a number of other creative perks, it must be included as taxable income on their W-2 forms. Moreover, an employer will also have to pay various taxes on the fair market value of the benefit. Be sure to discuss with a tax advisor so you can weigh the options.

Which Fringe Benefits Are Non-Taxable Benefits?

To keep things simple, any benefit provided by an employer to its employees is taxable unless the law specifically excludes it. There are special rules to qualify, but the IRS lists the following as non-taxable (or “tax-free”) benefits in IRS Publication 15-B (for special rules see Table 2-1, page 6):

  • Accident and health benefits (including healthcare)
  • Achievement awards
  • Adoption assistance
  • Athletic facilities
  • De minimis benefits (more on that below)
  • 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
  • Meals
  • No additional cost services
  • Retirement planning services
  • Transportation (commuting benefits)
  • Tuition reduction
  • Working condition benefits

While this is helpful guidance, there are some grey areas on what is considered taxable vs. non-taxable. It’s always best to consult a tax expert for formal advice if you’re unsure whether your existing or proposed fringe benefit would be regarded as taxable.

Key Insights on Popular Non-Taxable Benefits

Some of the most popular fringe benefits are for education, food, home office equipment, and commuting. Here are some insightful notes on how these types of fringe benefits work and in which ways they’re considered non-taxable. 

Professional Development

Support with professional development can be non-taxable up to $5,250 per year per employee. However, these expenses don't include the cost of a course or other education involving sports, games, or hobbies. There’s an exception here if the education has a reasonable relationship to your business, or is required as part of a degree program. Supplies that are kept other than textbooks should not be included.

Meals and Food 

Taxable benefits can be meals and food

Food and meals can be non-taxable if the value is considered to be de minimis (Latin for “about minimal things”). If something is of little monetary value, and accounting for it would cost more time than its value, it could be considered de minimis. It’s common to see this applied in cases where food is provided onsite as a convenience, such as a cafeteria. Other examples might include coffee, doughnuts, soft drinks, occasional meals or meal money, occasional parties, or picnics.

Stationery, Home Office Furniture, and Electronics 

These items can be non-taxable as long as they’re fully or partially being used for work or business purposes. If they’re only used partially for work, a percentage will apply. For example, if a computer monitor were used 60% for work, then 60% of the costs would be considered non-taxable. Having an accountable plan (more on this below) will help you define a policy of what’s considered an expense and what percentage applies. 

Home Internet

Internet access at home can be considered non-taxable in the same way that home office supplies are — as long as the items are fully or partially being used for work purposes. Again, the same percentage rule applies. 

Productivity Tools

Tools and software that help your employees stay productive can be considered non-taxable. This includes tools like a project management app, code editor, or communication software like Slack. If your employees also use these tools personally outside of work, only the work-related amount is non-taxable. 

Health and Wellness

Health and wellness benefit plans and programs (including stipends for gym memberships, fitness classes, meditation apps, and more) are considered income and are therefore taxable. However, there are ways you can offer support in non-taxable ways — namely, if you have an onsite gym or health studio. 

Typically, you can exclude the value of an on-premise gym or other athletic facility that meets specific requirements, which may also include onsite fitness classes like yoga or boot camps. That said, the rules are vague, so always seek professional advice on your setup. 

Commuting Benefits

Commuting benefits: Animated gift of animals on scooters

Benefits that support your employees’ commutes can be considered non-taxable up to certain limits. These include up to $270 for rides in a commuter highway vehicle, transit passes, or qualified parking. Bicycle commuting used to be included, but this ended in 2017. 

Student Loan Relief

According to a recently passed bill, student loan relief can be considered non-taxable until the end of 2020. Employer student loan contributions used to be considered taxable as regular income in the U.S., but there’s a temporary change to help soften some of the challenges brought on by COVID-19. As such, payments of student loan principal and interest by an employer to either an employee or a lender is not taxable to the employee if paid on or before December 31, 2020.

COVID-19 Disaster Relief Program Support

It may be comforting to know that COVID-19 Disaster Relief Program support can be considered non-taxable. In light of the pandemic situation, some companies are supporting employees in need with disaster relief payments. There's a lot of grey area on how this applies to Coronavirus, so be sure to review the details.

What's an Accountable Plan?

An accountable plan is a policy document that defines expense reimbursement policies for employees. Think of it as a guidebook that outlines taxable and non-taxable benefits in a way that makes sense to your employees. 

Accountable plans should make it clear which expenses (or portion of) are considered income (taxable benefit to an employee) and which are considered to be a company expense that the employer pays (non-taxable benefit to an employee). 

Doing so means there are no grey areas within your company, and everyone has a simple understanding of which fringe benefits are taxable or non-taxable. It's up to the discretion of the company to follow the IRS regulations and guidelines, but it’s best to create your accountable plan with the support of someone with knowledge of tax law. 

An accountable plan is optional, but it can be an excellent way to support employees without imposing unnecessary tax burdens on them. It also clearly defines and sets expectations regarding common expenses or benefits like work from home office supplies allowances and education support. 

What About Tax-Advantaged Benefits?

Taxable benefits: Funny South Park gif

A tax-advantaged benefit is a specific type of employee fringe benefit. Tax-advantaged benefits are perks and programs that can be offered by a company to employees that decrease the employee’s total taxable income. This creates monetary savings for both the employer and the employee, so it’s worth delving into. 

Tax-advantaged benefits can seem complicated to understand, which is why so many companies don’t take advantage of them. In reality, it involves taking a non-taxable benefit that an employee pays for with their post-tax income and offering to pay that expense directly with pre-tax dollars. The amount is then taken through the payroll system as a tax deduction from the employee’s next paycheck. 

It’s not always easy to get your head around how tax-advantaged benefits work or how to implement them in your company, but they can be valuable for everyone. To help you make the most of tax-advantaged benefits, book a call with us.

‍How Can I Be Proactive With Taxable Benefits?

Most companies want to provide appealing benefits without putting new tax burdens on their employees. Luckily, there are ways to do this that make sense for everyone. 

In the case of taxable fringe benefits, you can avoid imposing more owed taxes on your employees with what’s known as a “tax gross up.” This is where an employer offers an employee the gross amount that will be owed in taxes. The employer applies an estimate of how much they think an employee will be claiming in taxable fringe benefits throughout the year, and adds this to the payroll software for tax withholding and to account for taxes on every paycheck.

For example, if you give your team $100 per month in fringe benefits (or $1,200 per calendar year), you can tell your payroll system to account for this additional $100 in income that will be given to your employee outside of their paychecks. Your payroll system will then account for this on each paycheck, and withhold the proper taxes for each employee. 

At the end of the year, you can adjust this to account for the actual amount an employee spent. This amount will typically be lower than the projected amount, so an employee would receive a tax credit from this instead of owing taxes.

Fringe Benefits Simplified

While it might sound confusing, a fringe benefit is just a fancy way of saying employee benefit or perk. Fringe benefits are an effective way to support employees, improve job satisfaction, and make a positive impact on someone’s everyday life. When used strategically, these benefits also create wins for the company and help to attract the right kind of candidates for the future. 

Figuring out fringe benefits and offering them to your employees should be simple. To that end, we’re on a mission to help you offer and manage fringe benefits and stipends that your employees will love. Discover how we can help you by booking a demo and we’ll happily walk you through the entire process. It’s easier than you think!

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