Employers often give their employees a wide assortment of fringe benefits such as child care or stocking a fridge with snacks in order to encourage them to remain with the company. While these benefits may not have specific dollar values to employees, the IRS treats fringe benefits like income. Unless otherwise specified in the tax law as excludable, fringe benefits are considered taxable.
Common fringe benefits subject to taxation:
- Health Insurance
- Vacation/Leave/Holiday Pay
- Employee Discounts
- Meals and cafeteria plans
- Transportation benefits
- Gym Memberships
- IRAs and other retirement plans
- Childcare/dependent care services
Exclusion rules for fringe benefits
Some fringe benefits, in its entirety or in part, may be excludable from taxable income. This exclusion applies to federal income tax and in most cases also from FICA, Medicare, and FUTA taxes. The IRS has many specific rules depending on the kind of fringe benefit and at certain percentages or set dollar amounts listed in Publication 15-B. Here are some common ones worth noting.
- Accident and health benefits (not including long-term care) are exempt from federal income, FICA, Medicare, and FUTA taxes.
- Meals are exempt from federal income, FICA, Medicare, and FUTA taxes if furnished on your business premises or are considered ‘de minimis’.
- Dependent care benefits are exempt up to a limit of $5,000 ($2,500 for married filing separately).
- Athletic facilities may be exempt if used substantially during a calendar year and if the facility is operated by the employer on premises owned or leased by the employer.
General Valuation Rule
For the most part, as an employer, you will need to use the General Valuation Rule when determining the value of most fringe benefits. General Valuation Rule is the rule that the value of a fringe benefit is determined by its fair market value. Fair market value is based off of the amount that you as an employer would charge an unaffiliated 3rd party for a specific fringe benefit.
Reporting and withholding fringe benefit taxes
Values of fringe benefits can be added onto the regular wages of a payroll period for an employee and the correct amount to withhold for federal income tax can be calculated. You also have the option of separately withholding fringe benefits for income tax at a flat 25% rate (the same rate that applies to supplemental wages).
These are just some general insights about fringe taxes and how employers should factor them in for taxation purposes. Depending on the fringe benefits your company offers employees, it may turn into a labyrinth of rules to navigate. Such detail needs a familiar set of hands to help with. Luckily, that is where we can come in to help! MiklosCPA is a Los Angeles-area CPA firm focused on helping businesses with their accounting and tax needs. We use a mix of online bookkeeping services and personalized communications to help your business manage the accounting so that you can focus on building the business. If you are interested in learning more about our services, contact us! Or if you enjoyed this article, follow our social media for future tax tip and other “good to know” articles.