Office finances
Emil Aite
January 17, 2020
8 min

Fringe Benefits and Taxable Benefits Demystified (USA 🇺🇸 version)

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Fringe Benefits and Taxable Benefits Demystified (USA 🇺🇸 version)

Emil Aite
June 29, 2020
Fringe Benefits and Taxable Benefits Demystified (USA 🇺🇸 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 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 additions to compensation that companies give their employees. Fringe benefits may be given to all employees or some based on seniority or performance. The benefits may be for costs related to their work while others are geared to general job satisfaction.

Fringe benefits enable employers to compensate employees outside of a salary. Common fringe benefits include health insurance, meal programs, education stipends, stock options, home office setup, and mental wellness support. But fringe benefits provided can also become as creative as free haircuts, pet care, beer & cocktail Fridays, or monthly beauty budgets.

office happy hour
Credit: Melissa K. Jones

Some of the most successful fringe benefits align what employees care about, employer values, building customer empathy, or teach employees about the company's products & services. These fringe benefits become much more valuable than their monetary value. Here are some examples:

  • Hinge, a dating app offers all employees a $200 monthly date stipend to go on great dates and build relationships outside of 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 build more empathy for hosts and the customer experience while enjoying an amazing vacation.
  • Hoppier (that's us), a tool for managing stipends offers an anything monthly stipend allowing employees to set their own stipend rules. Employees get to know the product while having the freedom to make their own unique decisions on where & who to spend with - so meta.
  • You can also find many more than 121+ examples of stipends here.

Some fringe benefits are considered taxable benefits and some are not.

What are taxable benefits and why are they a thing?

A taxable benefit is a fringe benefit that is perceived and taxed as income. The whole reason is to avoid an employer/employee relationship where income tax is avoided for compensation that should be taxed. For example: you can't pay employees in gift cards or lawn mowers or however creative an employer may get to avoid burdening employees with tax. However there's a lot of grey area on what should be taxed or not.

History of fringe benefits?

The term fringe benefit first came into common usage in the late 1940s as the world returned to regular work after World War II. But fringe benefits date back to centuries ago. In the Middle Ages, workers were sometimes compensated with extra food or old garments.

fringe benefits history
Source

The first modern fringe benefits came about in the latter part of the 19th century, when railroad and mining companies began to provide the services of company doctors to their employees. Later during World War II, more employers began to offer health insurance programs as a means of keeping and retaining workers. Shortly after governments passed new laws to start defining which benefits should be considered taxable benefits. Over the last decades, the variety of fringe benefits offered by employers grew into many of the creative benefits that we know today.

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Which fringe benefits are non-taxable benefits?

Any benefit provided by an employer to its employees is taxable unless the law specifically excludes it. To qualify there are special rules but the IRS lists the following as non-taxable benefits in IRS Publication 15-B (for special rules see Table 2-1, pg 6):

  • Accident and health benefits
  • 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

Some important insights to note on common fringe benefits include (other common benefits not listed below include standard health insurance, stock options, saving matching plans):

  • Educational assistance - can be considered non-taxable up to $5,250 per year for an employee. However, these expenses don't include the cost of a course or other education involving sports, games, or hobbies, unless 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 & food - can be considered non-taxable if it is considered De Minimis. Meals & food provided to an employee can be considered De Minimis if it has so little value that accounting for it would be unreasonable or administratively impracticable or if it's provided on-premise at the convenience of the company. For example: coffee, doughnuts, soft drinks, occasional meals or meal money, occasional parties or picnics.
  • Office stationary, home office furniture and electronics (monitors, keyboards, etc), or other work related supplies - can be considered non-taxable as long as the items are fully or partially being used for work purposes. The items could be non-taxable up to the percentage amount that they are deemed being used for work purposes. You will need an accountable plan (see below for an explanation) to define a policy of what is considered expense-able and up to what percentage at your company.
  • Home internet - can be considered non-taxable just like above, as long as the items are fully or partially being used for work purposes. The items could be non-taxable up to the percentage amount that they are deemed being used for work purposes. You will need an accountable plan (see below for an explanation) to define a policy of what is considered expense-able and up to what percentage at your company.
  • Productivity tools - can be considered non-taxable, typically this would include software or other tools that enables employees to get their job easier, for example a faster email client, todo list app, or better code editor. The nature of these purchases makes them deemed as being used partially or fully for work productivity purposes. However, if employees are empowered to purchase their own licenses, it never hurts to be safe with an accountable plan (see below for an explanation).
  • Health and wellness - is considered taxable, there does not seem to be a way around this one. The tax treatment of health and wellness programs is quite clear. Health and wellness programs (including stipends for gym memberships, fitness classes, meditation apps, etc) are considered income and therefore taxable. However, you can exclude the value of an on-premises gym or other athletic facility that meets requirements. This may also include on-site fitness classes like yoga or boot camps, but the rules are vague.
  • Commuting benefits - can be considered non-taxable up to certain limits if for rides in a commuter highway vehicle and/or transit passes ($270) or qualified parking ($270). Bicycle commuting used to be included but unfortunately is not after 2017 :(
  • Student loan relief - can be considered non-taxable until the end of 2020 according to this recently passed bill. Employer student loan contributions used to be considered taxable as regular income in the U.S.. However, to help alleviate challenges of COVID-19, 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 - can be considered non-taxable. Some companies are considering supporting employees in need with disaster relief payments. There's a lot of grey area on how this applies to COVID-19 but more can be read here.

What's an accountable plan?

An accountable plan is a document made by an employer, defining reimbursement policies for employees, including what expenses or portion of the expenses should be considered income (taxable benefit to an employee) or company expense (non-taxable benefit to an employee). It's up to the discretion of the employer to follow the IRS regulations & guidelines and unique understanding of the company on what is business-related spend. For example, expenses related to: home office, internet, cell phone, or vehicle mileage can be added to an accountable plan.

An accountable plan is optional, your accounting/finance team may already have one in place. If you don't it can be a great a way to support employees without implying unnecessary tax burdens on them.

What about tax-advantaged benefits?

Since you made it this far there is another concept you may have heard of or already know about. But you definitely want to understand tax-advantaged benefits. A tax-advantaged benefit is a fringe benefit that an employer offers its employees which can decrease the total taxable income of an employee, this saves money for the employer and employee.

The way it works is; an employer takes a non-taxable benefit that an employee is currently paying for with post-tax payroll income, instead the employer offers to pay for that expense directly with pre-tax dollars and deducts the employee's next payroll.

It's a no-brainer to implement tax-advantaged benefits, but a lot of companies don't do it because it's confusing and hard. That's why managing tax-advantaged benefits is a big part of what we help accomplish with Hoppier. Whether you'd like us to help or venture on your own, we also have a guide to help you learn more about tax-advantaged guidelines and examples (coming soon).

How can I be proactive with taxable benefits?

Most companies want to provide these benefits without putting new tax burdens on their employees and there are ways to do this. Again it's important to mention for any fringe benefits that can be considered non-taxable, it is worth ensuring there's no burden of paying unnecessary tax on employees or burden of deciding what income should be taxable. As well, there are likely large opportunities to save the employee and company money on those non-taxable benefits, as mentioned above in the tax-advantaged section.

For fringe benefits that are being considered taxable, if you do not want to impose more owed taxes on employees you can do what the tax people call a tax gross up. A tax gross up is when an employer offers an employee the gross amount that will be owed in taxes. The employer proactively applies an estimate of how much they think an employee will be claiming in taxable fringe benefits throughout the year, and adds this to their payroll software to withhold and account for taxes on every paycheck.

For example: If you give your team $100/mo in fringe benefits (or $1,200 per 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, however, you can adjust to what the actual amount an employee spent was (as it's unlikely they use the entire $100 each month). This amount will typically be lower than the projected amount ($1,200 for the year), so an employee would receive a tax credit from this instead of owing.

Bottom line

A fringe benefit is just a fancy way of saying employee benefit or perk. Fringe benefit programs can be effective ways of increasing an employee's job satisfaction and quality of life. While also aligning employee & company value and attracting talented future employees.

We don't claim to be tax specialists and there may be different implications based on country, state, county, province, town, company, employee and more.

However, when it comes to fringe benefit deductions, handling them should be simple. It’s the employer’s responsibility to calculate which fringe benefits are included in an employee’s taxable income, along with what information should be included in their W-2. When in doubt, you can refer to the IRS’s taxable benefit guide. Or talk to your team members responsible for tax/accounting/payroll, they like this stuff!

At Hoppier this is our wheelhouse, we are on a mission to help you with fringe benefits and stipends! We can help simplify the tax process and eliminate your reimbursement burdens, so don't hesitate to reach out to chat with us.

IRS Official references:

Other helpful links and references:

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