Employee fringe benefits are benefits that employees receive as a result of their employment, including those benefits provided through someone other than an employer. Note that "employee" includes workers who are disabled or retired. Spouses and dependent children of the employee may also claim the employee fringe benefits.
Are Employee Fringe Benefits Taxable as Gross Income?
The federal tax code's defines gross income as any instance of undeniable accession to wealth from whatever source derived. Given this definition, employee fringe benefits are taxable gross income for all taxpayers.
Does the IRS Exclude Some Benefits Not Taxable as Gross Income?
The IRS has designated a number of fringe benefits which are not taxable as gross income. Importantly, the IRS has indicated that the benefits excluded from the general rule that fringe benefits are gross income are only excludable from gross income if they are benefits available to all employees of a company. That is, if not all employees of a company have access to a particular benefit, then that benefit cannot be excluded from an individual taxpayer's gross income no matter what. This is known as the "non-discrimination rule."
For example, if an airline allows its executive employees to fly for free but does not allow its airline attendants to fly for free, then the airline cannot claim the exclusion. The purpose of this rule is to encourage companies to give all their employees access to the same benefits, regardless of where the employees are in the company’s hierarchy.
What Are the Exact Fringe Benefits Excluded from Being Taxed as Gross Income?
The following list represents just a few of the fringe benefits excluded from being taxed as gross income:
- No additional cost to employer services – A benefit which the employer offers to an employee which does not cause the employer to incur substantial costs, including foregone revenue. However, the service must be in the same line of work that the employee performs. For example an airline attendant who gets to fly for free may exclude the benefit on her tax return as long as the airline attendant does not cause a customer to give up his or her seat. This exclusion is subject to the non-discrimination rule.
- Qualified employee discounts – If the discount is on a service businesses are limited to giving a 20% discount. If the discount is on a good (something tangible) business are generally limited to discounting to cost (what they bought it for) or greater. This exclusion is subject to the non-discrimination rule.
- Working condition fringes – A benefit that is furnished by your employer free of charge that had you paid for it you would have gotten a business deduction. This benefit typically covers "benefits" which are required for the employee to perform his or her duties. Employee training and use of the company car are the most common examples. Importantly, you as a taxpayer do not get to exclude and deduct this benefit, you only get to forgo reporting it as a part of your gross income. Subject to non-discrimination rule.
- De minimus fringe – A benefit you receive which your employer does not do an accounting for (i.e. the coffee in the lounge or copy paper). Importantly, your employer may still be able to take deductions for these items despite the fact that you took them as exclusions from your income. This exclusion is not subject to the non-discrimination rule.
- Qualified transportation fringe – A work related transportation reimbursement that an employer provides to an employee for the employee to get back and forth to work. Importantly, this fringe doesn't include use of a company car, but in big cities does include up to a maximum of $100 towards a transportation pass on public transport. Bicycles are also excluded up to a maximum of $20. Cannot overlap with working condition or de minimis exclusions.
- Qualified moving expense reimbursement – A benefit that allows reimbursement of reasonable moving costs and lodging during the move. Make sure to document all expenses.
- Qualified lodging exclusion – A benefit that allows employees to live on the employer’s business premises as a condition of employment and provided at the convenience of the employer. The benefit must be in a written contract, but the employer need not own the property for the exclusion to be effective. If the employee performs a significant number of duties on the property or the employer does a significant amount of business on the property, then the benefit can apply. Hotel managers who live adjacent to the hotel they manage are the most common examples.
Reciprocal agreement – If two employer agreed to extend their services as benefits to the employees of the other employer in a written agreement, then the employees can claim the benefits as an exclusion. For example, if an airline agrees to give the employees of a hotel chain free flights and in return the hotel chain gives the airline’s employees free nights at the hotel, then both company’s employees can claim the benefits tax free.
Should I Contact an Employment Lawyer?
With all the tax software out there, most people are capable of doing their taxes on their own. More sophisticated and more complex tax returns may require more time and perhaps the advice of a lawyer. Additionally, should you have a dispute with the taxing authority regarding your deductions and exclusions, you may need to go to court. An experienced employment lawyer or tax lawyer may be required.