FAQs About Fringe Benefits
Fringe Benefit FAQs
Fringe benefits are an important part of employee compensation and payroll
administration. Benefits provided by an employer can affect an employee's
taxable income, payroll withholding, W-2 reporting, and employer payroll
tax obligations.
Payroll professionals must understand how benefits are treated under federal
tax rules and applicable state requirements. For example, some fringe
benefits are excluded from taxable wages when specific requirements are met,
while others must be included in an employee's income.
Common FAQs About Fringe Benefits
The Fringe Benefit FAQs from Payroll Training Center provides answers to common questions about taxable and nontaxable fringe benefits, imputed income, health insurance, retirement plans, company vehicles, educational assistance, dependent care, meals, employee discounts, gifts, awards, moving expenses, payroll withholding, and year-end reporting.
These FAQs are designed for payroll professionals, HR professionals,
accountants, bookkeepers, controllers, benefits professionals, and
business owners.
What is a fringe benefit?
A fringe benefit is a form of compensation or benefit provided by an
employer in addition to an employee's regular wages.
Examples include:
- Health insurance
- Retirement plan contributions
- Company vehicles
- Educational assistance
- Dependent care assistance
- Group-term life insurance
- Employee discounts
- Meals
- Transportation benefits
- Employer-provided housing
- Certain awards and gifts
Are fringe benefits taxable?
Some are taxable and some are not. The tax treatment depends on the
specific benefit and whether the requirements for an exclusion from income
are satisfied.
What is a taxable fringe benefit?
A taxable fringe benefit is generally a benefit that must be included in an
employee's taxable income. The value of the benefit may need to be added
to the employee's wages for payroll tax and reporting purposes.
What is a nontaxable fringe benefit?
A nontaxable fringe benefit is a benefit that qualifies for exclusion from
an employee's income under applicable tax rules. Specific requirements must
generally be satisfied for the exclusion to apply.
How does payroll tax a fringe benefit?
When a fringe benefit is taxable, payroll generally determines its taxable
value and includes the appropriate amount in the employee's wages for
applicable withholding and reporting.
Are taxable fringe benefits subject to federal income tax withholding?
Generally, taxable fringe benefits are included in wages for federal income
tax purposes unless a specific exception applies.
Are taxable fringe benefits subject to Social Security and Medicare taxes?
Generally, taxable fringe benefits are subject to applicable employment
taxes unless a specific exclusion applies.
Are fringe benefits subject to FUTA?
Certain taxable fringe benefits can be included when determining wages
subject to federal unemployment tax, subject to applicable rules.
Are fringe benefits subject to state income tax?
It depends on the applicable state. State treatment may differ from
federal treatment, so payroll should review the rules applicable to the
employee.
Is employer-provided health insurance taxable?
Employer contributions toward qualifying employer-sponsored health coverage
are generally excluded from an employee's federal taxable income, subject
to applicable rules.
Are employee health insurance premiums taxable?
Employee contributions toward qualifying employer-sponsored health coverage
can receive favorable tax treatment depending on the plan and how
contributions are made.
What is imputed income?
Imputed income is the value of certain noncash benefits that must be treated
as taxable income to an employee. Payroll may need to add the taxable value
to the employee's wages for tax withholding and reporting even though the
employee did not receive the value as cash.
Are taxable fringe benefits subject to federal income tax withholding?
Generally, taxable fringe benefits are included in wages for federal income
tax purposes unless a specific exception applies.
Are taxable fringe benefits subject to Social Security and Medicare taxes?
Generally, taxable fringe benefits are subject to applicable employment
taxes unless a specific exclusion applies.
Are gift cards taxable?
Yes, always. A gift card is a cash equivalent and there is no de minimis
exception for cash or cash equivalents regardless of how small the amount.
This is the most common fringe benefit error in small organizations—a
$25 holiday gift card handed out to staff is taxable wages, and treating it
otherwise is an audit finding every time.
What is the de minimis fringe benefit exclusion?
An exclusion for benefits so small that accounting for them would be
unreasonable or administratively impractical—occasional coffee and
snacks, occasional event tickets, occasional personal use of a copier.
It does not apply to cash or cash equivalents, and "occasional" is doing
real work in that sentence: a benefit provided routinely stops being de
minimis.
How is personal use of a company vehicle handled?
Personal use is a taxable fringe benefit and must be valued using an
accepted method, added to wages, and reported. Employers must obtain
records substantiating business versus personal mileage; absent adequate
records, the full value of the vehicle's availability can be treated as
taxable. Employers may elect to withhold income tax on it or to include it
and withhold only FICA under certain conditions.
Are employee achievement awards taxable?
Tangible personal property awards for length of service or safety
achievement can qualify for exclusion within limits and only under a
qualified plan meeting specific conditions. Cash, gift cards, vacations,
meals, lodging, tickets, and securities are specifically excluded from the
definition of tangible personal property, so those are taxable regardless
of the plan.
When are taxable fringe benefits reported?
They must be included in wages for the period in which the employer treats
them as paid, and employers have some flexibility in how frequently they
run them through payroll. What does not work is discovering them in
January—year-end catch-up creates a large one-time withholding hit to
the employee and frequently means the deposits during the year were
understated.
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