Fringe benefits are a significant aspect of employee compensation, often playing a crucial role in attracting and retaining talent. Understanding what constitutes a fringe benefit, its tax implications, and reporting requirements is essential for employers.
Defining Fringe Benefits
A fringe benefit is any form of compensation provided to an employee in addition to their regular salary or wages. These benefits can take various forms, including but not limited to:
- Health insurance
- Life insurance
- Employee discounts
- Company car
- Housing allowance
- Meals
- Transportation benefits
- Educational assistance
- Stock options
The IRS Publication 15-B provides employers with detailed guidelines on the employment tax treatment of these fringe benefits. It supplements Publication 15, Employer’s Tax Guide, and Publication 15-A, Employer’s Supplemental Tax Guide.
Taxability of Fringe Benefits
Generally, the value of a fringe benefit is considered taxable income to the employee and is subject to income tax withholding and social security, Medicare, and federal unemployment (FUTA) taxes. However, certain fringe benefits are excludable from an employee’s gross income, meaning they are not subject to these taxes.
Common Tax-Exempt Fringe Benefits:
- Health Insurance: Employer-provided health insurance coverage is generally excludable from an employee’s income.
- Qualified Retirement Plans: Contributions to qualified retirement plans, such as 401(k)s, are often tax-deferred.
- Dependent Care Assistance: Up to a certain amount, employer-provided dependent care assistance may be excluded from income.
- De Minimis Benefits: Small, infrequent benefits that are administratively impractical to account for, such as occasional snacks or coffee, are generally excludable.
Specific Fringe Benefit Rules and Regulations
Several specific regulations govern the tax treatment of certain fringe benefits. Here’s a look at a few key areas:
Qualified Transportation Benefits
Qualified transportation benefits, such as commuter highway vehicle transportation and transit passes, have monthly exclusion limits. For 2025, the monthly exclusion for qualified parking is $325 and the monthly exclusion for commuter highway vehicle transportation and transit passes is $325.
Cents-Per-Mile Rule
The cents-per-mile rule allows employers to reimburse employees for business use of a personal vehicle. The business mileage rate for 2025 is 70 cents per mile. Under certain conditions, you may use the rate under the cents-per-mile rule to value the personal use of a vehicle you provide to an employee.
Health Flexible Spending Arrangement (FSA)
A health flexible spending arrangement (FSA) allows employees to set aside pre-tax dollars for eligible healthcare expenses. For plan years beginning in 2025, a cafeteria plan may not allow an employee to request salary reduction contributions for a health FSA in excess of $3,300.
Moving Expense Reimbursements
While generally suspended for tax years beginning after 2017 and before 2026, the exclusion for qualified moving expense reimbursements is still available in the case of a member of the U.S. Armed Forces on active duty who moves because of a permanent change of station due to a military order.
Bicycle Commuting Reimbursements
The exclusion of qualified bicycle commuting reimbursements from an employee’s income is suspended for tax years beginning after 2017 and before 2026.
Reporting and Withholding
Employers are responsible for properly reporting the value of taxable fringe benefits on an employee’s Form W-2. They must also withhold and deposit the appropriate income tax, social security, and Medicare taxes.
Withholding on Supplemental Wages
P.L. 115-97 lowered the federal income tax withholding rates on supplemental wages for tax years beginning after 2017 and before 2026.
Form 1099-NEC, Nonemployee Compensation
Use Form 1099-NEC to report nonemployee compensation paid in 2024. The 2024 Form 1099-NEC is due January 31, 2025.
Staying Compliant
Navigating the complex rules surrounding fringe benefits requires careful attention to detail. Employers should consult with a tax professional to ensure they are in compliance with all applicable regulations. Regularly reviewing IRS publications, such as Publication 15-B, is also crucial for staying up-to-date on the latest changes.
Conclusion
Fringe benefits are a valuable component of employee compensation packages. By understanding the rules and regulations governing these benefits, employers can create competitive compensation packages while remaining compliant with tax laws. Consulting resources like IRS Publication 15-B and seeking professional tax advice are essential steps in managing fringe benefits effectively.
