Employers often use tax free employee fringe benefits to attract and retain qualified workers.
Any fringe benefit provided to you as an employee is taxable and must be included in your income unless the law specifically excludes it.
However, some fringe benefits provided by your employer may be excluded from your taxable income. To the extent this is the case, you may be receiving tax-free compensation. The benefits are also generally tax deductible by the employer.
Following is a select list of some common fringe benefits which are excluded from federal income tax withholding, and in most cases are excluded from FICA taxes as well (and therefore not reported on Form W-2):
Accident and health benefits
This is a big one. Health insurance is critical in getting the proper medical treatment due to a potential injury or illness. It also helps you to avoid potential financial catastrophe in such cases.
Many employees get their health insurance coverage through their employer. Although you as the employee may be required to pay part of the premium, the majority is typically covered by the employer.
Regardless, amounts paid by your employer will be tax-free to you, and amounts you pay will reduce your taxable income.
Examples include health insurance, medical expense payments and reimbursements under an employee health plan, and even qualified long-term care insurance.
Health savings accounts (HSAs)
Your employer may also contribute to your HSA. These types of accounts can be used to pay for qualifying out of pocket medical expenses.
In order to be eligible to contribute (or receive contributions) to an HSA, you must be covered by a high deductible health insurance plan.
Total (employer plus employee) contributions cannot exceed $3,400 for individual coverage, and $6,750 for family coverage. If you are age 55 or older, these limits are increased by an additional $1,000.
Employer contributions are not taxable to the employee, and employee contributions reduce your taxable wages.
See Last Minute Tax Planning Strategies for more information on how an HSA can save you money.
Dependent care assistance
Many of us require someone to watch our children or other dependents while we (and our spouses if married) work. Employers are aware of this fact, and as such some may provide you with child care benefits.
The maximum exclusion for funds used to pay for child care to allow an employee to work is $5,000. Employer dependent care benefits in excess of this amount are taxable to the taxpayer.
It is also important to understand that you must reduce the maximum amount of allowable dependent care expenses in figuring your Child and Dependent Care Credit by the amount of employer benefits received (reported in box 10 of your Form W-2).
See Child Related Tax Credits – Do You Qualify To Claim Them? for more information.
Employers may also provide educational assistance to their employees. This can be a win-win for all involved. The employer gets a more qualified employee, and you get assistance in paying for additional education. Not to mention that this assistance may be provided on a tax-free basis up to specified limits.
Qualifying assistance includes tuition, cost of books, equipment, fees, and supplies. Lodging and meals are not exempt for this purpose. The exclusion is limited to $5,250 each year.
Keep in mind that expenses paid for or reimbursed by your employer cannot be used in computing education tax credits or deductions on your tax return.
Staying fit is an important part of life. It can help you feel better and live longer. But physical fitness may also help you succeed financially.
Employees can exclude from income the value of using a gym or other athletic facility operated by the employer. The facility must be located on premises the employer owns or leases and it may not be available for residential use.
The athletic facility must also be primarily used by employees of the employer, their spouses, and their dependent children.
Group-term life insurance
Employer provided group-term life insurance will typically not meet your needs completely. However, it can be used as a supplement to privately acquired life insurance.
The added benefit is that the cost of up to $50,000 of employer provided group term coverage is excluded from tax.
De minimis benefits
Some benefits provided by your employer may have very little value that accounting for them would be impractical. As such, these types of benefits may be excluded from your taxable income.
One example is the occasional personal use of a cell-phone which was provided to you for business purposes by your company. Occasional use of a copy machine is another example. Holiday gifts with low fair market value, and other occasional benefits such as meals, parties, and tickets for sporting events may also be nontaxable.
Keep in mind, however, that any cash or cash equivalent benefit (i.e. gift card) is taxable regardless of the amount.
Achievement at work can have many benefits. For one, you may ultimately get promoted and receive a higher salary. But you may also receive an achievement award which may be nontaxable.
This nontaxable treatment applies to awards for length of service or safety achievement. However, it only applies to tangible personal property. Awards consisting of cash, gift certificates, meals, vacations, tickets to events, and other intangible property are taxable.
The maximum exclusion is $1,600 per year ($400 for “non-qualified plan” awards). See IRS publication 535 for more information.
Sometimes employers may give their employees discounts on the products or services they sell. Some of these discounts may be tax free up to specified limits.
Discounts on real estate property or investments are not tax-free. Employee discounts are limited to 20% of the regular price for services. For merchandise and other property, the limit is the employer’s gross profit on the items.
Moving expense reimbursements
Sometimes employers may reimburse you for moving expenses if you are relocated. Some of these reimbursements may be excluded from your income.
This may include the cost of moving personal effects and household goods from the previous to the new home. Travel and lodging in going from the old to the new home also qualify. Note, however, that meals are not qualifying moving expenses.
Further, any move must meet the distance and time tests as well.
Distance test – The commute to the new job would be 50 miles greater from old home than from the new home
Time test – The employee works at least 39 weeks during the first 12 months after arriving in the general area of the new job location
No-additional cost services
These are services provided to employees which don’t cause the employer to incur additional cost. The service must also be offered to customers in the ordinary course of the line of business in which the employee performs substantial services.
Examples include excess capacity services such as airline, bus, or train tickets; hotel rooms; or telephone services provided free or at a reduced price to employees working in those line of business.
Transportation (commuting) benefits
Some transportation or commuting benefits provided by employers may also be provided tax-free. De minimis and qualified transportation benefits are both excluded from taxation.
An example of a de minimis benefit is occasional transportation fare. Qualified benefits include a transit pass ($255 max), qualified parking ($255 max), and qualified bicycle commuting reimbursement ($20 max).
Working condition benefits
These are benefits provided to you as an employee so that you can perform your job duties.
Examples include a company provided car or cell phone used for business, and job-related education provided to an employee.
Occasional meals are excluded under the de minimis rule. Examples include coffee, doughnuts, soft drinks, occasional parties, picnics, etc. Also excluded under this rule are occasional meals to enable an employee to work overtime.
The 50% limit on meal deductions does not apply to the employer if meals are excluded as deminimis.
Meals furnished on the employer’s business premises for the employer’s convenience (purpose other than to provide employee with additional pay) may also be deductible by the employer and tax-free to the employee. However, cash allowances are not excluded from the employee’s income.
For more detailed information on tax free meals and other employee fringe benefits provided by employers, see IRS publication 15-B.
You should always find out what types of fringe benefits your employer provides. Not only may you benefit from whatever is provided, but it may be tax free as well. The same applies for employers. Knowing which types of benefits you can provide tax-free to your employees may help you build a quality workforce.
Note, however, that there are limitations and exceptions if you are a 2% or greater shareholder in an S corporation. The same goes for fringe benefits that are provided on a basis which favors highly compensated employees.
In such cases, the fringe benefits provided will generally be deductible as wages or other compensation by the employer, and will represent taxable income to the employee.