When it comes to the taxes on fringe benefits, there’s no shortage of questions.
HR professionals already have a lot on their plate, and tax compliance is like the overcooked brussels sprouts that our parents used to make us eat, not our favorite.
If you find yourself asking:
- “Are fringe benefits tax free?”
- “Which fringe benefits are taxable?”
- “Are there ways to give employees fringe benefits that would make them tax free?”
- “How does fringe benefits tax work?”
- “How is fringe benefits tax calculated?”
You’re in the right place.
Understanding the correct taxes on perks and then correctly accounting for them can be a daunting task for anyone. You should always confirm with your accountant, but we wanted to help by putting together this helpful guide as to which perks are taxable, non-taxable, how they’re calculated, and who pays. For more information, review IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits.
First know if it meets the de minimis criteria
In general, a de minimis benefit is one that is so small as to make accounting for it unreasonable or impractical. Examples of de minimis benefits are:
- Occasional snacks, coffee, doughnuts, etc.
- Occasional tickets for entertainment events
- Holiday gifts
- Occasional meal money or transportation expense for working overtime
- Group-term life insurance for employee spouse or dependent with face value not more than $2,000
- Flowers, fruit, books, etc., provided under special circumstances
- Personal use of a cell phone provided by an employer primarily for business purposes
In determining whether a benefit is de minimis, you should always consider its frequency and its value. An essential element of a de minimis benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation.
Now understand which fringe benefits are taxable vs nontaxable
Nontaxable fringe benefits are as follows:
The list below are perks that are non-taxable as they fall under a specific list of excluded fringe benefits determined by the IRS.
- Professional development perks. Examples include books, conferences, and courses.
- Cell phone. If you are using your phone for work (and who isn’t using their phone for work), your data plan can be untaxed.
- Commuter perks related to parking. Parking your car for work is tax free up to $270 a month.
- Commuter perks related to transit. Public transportation costs between home and work are tax-free up to $270 a month.
- Student loan repayments. Putting payments toward interest or the principal on a “qualified education loan” are tax-free according to the CARES act of 2020. While this provision comes to an end at the end of 2020 - we are hoping that Congress extends this benefit!
- Equipment stipends. If your company is going to have you return the equipment you purchase for your home office, then this can be untaxed. Note though that if you get to keep that desk, chair, mouse, etc - those are taxable benefits.
- Internet stipends. If you are working from home and can submit a receipt showing your internet usage, that can be reimbursed untaxed.
Taxable perks are as follows:
- Health & wellness initiatives. Examples include a gym membership, meditation apps, a health & wellbeing stipend, etc.
- Food. Examples include catered lunches, in-office snacks, or meal allowances.
- Family. Examples include day-care subsidies, tickets to a sporting event, or house-keeping services.
- Pets. Examples include providing dog-walking services, doggy-day-care, or pet insurance.
- Productivity or Tech. Giving people noise-cancelling headphones, productivity software, or desk organizers.
- Travel or experiences. Examples include experience or travel stipends, flights, hotels on vacation, gifting experiences through software, etc.
- Charitable giving. Examples include charitable giving stipends or donation matching programs.
- Gift Cards. In any amount and for any purpose.
How much are perks/fringe benefits taxed?
Any fringe benefit under the taxable section above is considered taxable income.
Taxable perks must be included on an employee’s W-2 each year.
Who pays the taxes?
Either the company can choose to cover the taxes or pass the tax on to the employees.
If an employer wishes to cover the taxes, they do so by grossing up. Grossing up means the employer would give the employee money to cover the tax implication of the fringe benefits.
A company can also choose for their employees to cover the taxes themselves. In either scenario, the company must also pay their own payroll taxes on these benefits.
How using Compt can help with the tax side of perks
Unless managing taxes on a spreadsheet is one of your favorite parts of fringe benefits, you’ll likely want a software to automate the taxes for you. Without one, expect to spend a lot of time distinguishing between taxable and nontaxable fringe benefits that your employees are using.
At Compt, our perk stipend software has IRS tax compliance built-in. You only have to decide who covers the taxes and we handle the rest. Easy peasy, lemon squeezy. Schedule a demo to learn more about how Compt can help you automate stipends so you can easily support all of your people in meaningful ways.