How Are an Employee’s Fringe Benefits Taxed?

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How Are an Employee’s Fringe Benefits Taxed?

Employees who get common fringe benefits receive complete remuneration in addition to their regular income or salary. Employers provide a broad variety of fringe perks. Among the most typical fringe benefits are health insurance premiums, child care, transit coupons, and retirement-account matching contributions.

Employees must understand how typical fringe benefits are taxed in order to take use of an employer’s fringe benefits most effectively.

Key Takeaways

  • Life insurance, tuition help, and employee discounts are examples of fringe benefits that corporations provide to their workers.
  • If a fringe benefit is transferred in cash, such as a bonus or reimbursement for costs, it is likely to be taxed.
  • Benefits obtained in-kind or regarded de minimis are often exempt from taxes.
  • Other employee benefits that employers often give include health insurance, unemployment insurance, and worker’s compensation.
  • Employees’ W-2s contain taxable fringe benefits.

What Are Some Taxable Fringe Benefits?

Any fringe benefit provided as a bonus to an employee by an employer is considered taxable income unless it comes within the IRS’s list of exempt perks. Each year, taxable fringe benefits must be reported on an employee’s W-2, and the bonus’s fair market value is subject to withholding.

The most typical fringe benefits deemed a taxable component of total remuneration are reimbursement for mileage expenditures that exceed IRS rules and reimbursement for school or tuition fees that are not directly tied to work performance or exceed the specified IRS limits. Furthermore, if a bonus that comes within the category of working conditions benefit, such as a mobile phone or company automobile, is utilized outside of business, it may be deemed taxable.

  Tax Day Definition

The IRS standard mileage rate for business usage in 2022 is 58.5 cents per mile for taxpayers claiming a mileage deduction. Any sum in excess of this limit is taxed as income. For example, if a corporation reimburses its employees 65 cents per mile, the remaining 6.5 cents is taxed.

The Tax Cuts and Jobs Act, with the exception of some active-duty military members, abolished the relocation costs exception for taxpayers from 2017 through 2026.

Employers may deduct up to $5,250 from an employee’s earnings each year for education-related aid supplied under a recognized program. Amounts in excess of this limit are taxed as regular income.

Which Fringe Benefits Are Excluded From Taxation?

Although certain fringe benefits are considered taxable income for workers, there is a long list of regular fringe perks that are not taxable pay. For example, prizes for successes are excluded from tax withholding, as are accommodations granted to employees to enable them to execute their duties.

Fringe benefits that meet the criterion of de minimis benefits are not included for calculating taxable income. De minimis benefits are those with such a little monetary worth that employers would have difficulty accounting for them. A gift card given to an employee for a holiday or birthday, for example, is regarded as a de minimis benefit, as are beverages or snacks offered during a business meeting.

Meals are often not considered a taxable fringe benefit for workers, however certain conditions must be satisfied. Employers that purchase lunch or supper for their workers must do it on business grounds and as a benefit to the employee. This implies that if supplied during a long meeting or during compulsory overtime, a lunch might constitute a tax-free incentive to workers.

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Other non-taxable employee benefits include health insurance (up to a certain dollar amount), dependent care, retirement planning services, adoption assistance, group term-life insurance, qualified benefits plans such as profit sharing or stock bonus plans, commuting or transportation benefits, employee discounts, and working condition benefits only used for business purposes.

Special Considerations

Other key benefits provided to American workers include unemployment insurance, which is administered by individual states, and worker’s compensation.

Unemployment insurance gives temporary unemployment payments to some employees who have lost their jobs. To be eligible, the worker must not have caused the loss of employment, must have worked for a specified length of time and earned a specific sum as decided by their state of residency, and must be actively seeking for work.

Worker’s compensation, administered by the Department of Labor’s Office of Worker’s Compensation Programs (OWCP), compensates federal employees who are injured on the job or get a disease as a result of their employment. The wounded are paid financially, with medical care, with vocational rehabilitation, or with other advantages.

In addition to these government-sponsored programs, some firms provide health insurance to their workers, which is one of the most requested perks. Companies that pay their workers’ health insurance plans will not be required to withhold social security, Medicare, FUTA, or federal income taxes.

How Much Are Fringe Benefits Taxed?

Fringe benefits may be taxed at the employee’s marginal tax rate, or the employer may choose to withhold a flat supplementary pay rate of 22% on the amount of the benefit. The supplementary pay rate is 37% if the value of benefits surpasses $1 million in a year.

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What Fringe Benefits Are Excluded From Taxes?

Several fringe perks are tax-exempt according to the IRS. Adoption fees, group-term life insurance, retirement planning assistance, and de minimis benefits are among the advantages available (e.g., certain meals and employee parties).

Are Fringe Benefits Included in Gross Income?

Except for those excluded by the IRS, most fringe benefits are included in an employee’s gross income.

Are Taxable Fringe Benefits Included on a W-2?

Taxable fringe benefits are reported on an employee’s W-2.

The Bottom Line

As a recruiting or retention tactic, employers provide a broad variety of fringe benefits, which may account for a significant amount of an employee’s overall remuneration. To thoroughly evaluate benefit packages offered by different businesses, it is necessary to first understand how popular fringe benefits are taxed.

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