Employee fringe benefits are those benefits that an employee receives as a result of their employment. It may also include benefits that are provided through an entity other than the individual’s employer.
It is important to note that the term employee includes workers who are retired or disabled. The employee’s spouse and dependent children may also claim the employee fringe benefits.
What is Gross Income?
Gross income is any income that an individual earns during the year. This may include:
- Profits from stocks;
- Rental income; and
- Even income from illegal activities.
Not all of an individual’s income is taxed. However, determining an individual’s gross income is the first step in calculating their taxable income.
Adjusted gross income (AGI) is an individual’s gross income minus certain deductions, which may include:
- Certain trade and business deductions;
- Losses from sale or exchange of property;
- Deductions attributable to rents and royalties;
- Certain deductions of life tenants and income beneficiaries;
- Pension, profit-sharing, and annuity plans of self-employed individuals;
- Retirement savings;
- Certain portions of lump-sum distributions from pension plans;
- Penalties that are forfeited because of premature withdrawal of funds from time savings accounts or deposits;
- Paid alimony;
- Reforestation expenses;
- Certain required repayments of supplemental unemployment compensation benefits;
- Jury duty pay remitted to employer;
- Deduction for clean-fuel vehicles and certain refueling; and
- Moving expenses.
Taxable income is the amount of an individual’s income that is subject to tax. Taxable income is calculated by subtracting exemptions and standard or itemized deductions from the AGI.
Are Employee Fringe Benefits Taxable as Gross Income?
The United States federal tax code defines gross income as “any instance of undeniable accession to wealth from whatever source derived.” Pursuant to this definition, employee fringe benefits are taxable gross income for all taxpayers.
Does the IRS Exclude Some Benefits not Taxable as Gross Income?
The Internal Revenue Service (IRS) has designated a number of fringe benefits that are not taxable as gross income. It is important to note that the IRS has provided that benefits which are excluded from their general rule, which provides that benefits are gross income, are only excluded if the benefit is available to all employees of a company.
In other words, if all employees of the company do not have access to a particular benefit, then that benefit cannot be excluded from an individual taxpayer’s gross income no matter what. This rule is known as the non-discrimination rule.
For example, if an airline company permits its executive employees to fly without cost but does not permit its airline attendants to fly for free, then the airline cannot claim that as an exclusion. The purpose of this rule is to encourage companies to give all of their employees access to the same benefits, regardless of where the employee is in the hierarchy of the company.
What are the Exact Fringe Benefits Excluded from Being Taxed as Gross Income?
There are some fringe benefits that are excluded from being taxed as gross income. These include:
- No additional cost to employer services;
- Qualified employee discounts;
- Working condition fringes;
- De minimus fringe;
- Qualified transportation fringe;
- Qualified moving expense reimbursement;
- Qualified lodging exclusion; and
- Reciprocal agreement.
A no additional cost to employer services benefit is a benefit which an employer offers to an employee that does not cause the employer to incur substantial costs. This includes foregone revenue.
The service, however, must be in the same line of work that the employee performs. For example, an airline attendant who flies for free may exclude the benefit on their tax return so long as the airline attendant does not cause another customer to give up their seat. This exclusion is included in the non-discrimination rule.
Some employers allow qualified employee discounts. If this discount is provided on a service, businesses are limited to providing a 20% discount. If the discount is on a good, or something tangible, businesses are typically limited to discounting the good to cost, or what they purchased it for, or greater. This exclusion is included in the non-discrimination rule.
A working condition fringe benefit is a benefit that is furnished by an employee free of charge which, had the individual paid for it, they would have gotten a business deduction. This benefit usually covers benefits which are required for employees to perform their duties.
The most common examples include employee training and use of a company car. It is important to note that the taxpayer does not get to exclude and deduct this benefit, but gets to forgo reporting it as a pari of their gross income. This exclusion is included in the non-discrimination rule.
A de minimis fringe benefit is a benefit which an individual receives that their employer does not do an account for, such as coffee in the employee lounge or copy paper. It is important to note that the employer may still be able to take deductions for these items even though the taxpayer took them as exclusions from their income. This exclusion is not included in the non-discrimination rule.
The qualified transportation fringe benefit is a work-related transportation reimbursement that an employer provides to an employee for that employee to use to get to and from work. It is important to note that this fringe benefit does not include the use of a company car, but, in larger cities, it does include up to a maximum of $100 towards a public transport pass.
A bicycle may also be excluded as a qualified transportation fringe benefit up to a maximum of $20. This cannot overlap with the working condition or de minimus exclusions.
The qualified moving expense reimbursement is a benefit that permits reimbursement of reasonable moving costs and lodging costs during an employee’s move. It is important for the employee to document all of their expenses.
The qualified lodging exclusion is a benefit that permits an employee to live on their employer’s business premises as a condition of their employment and provided at the convenience of their employer. This benefit must be included in a written contract. However, the employer does not have to own the property for the exclusion to be effective.
If the employee performs a significant number of their duties on the property and their employer does a significant amount of business on the same property, this benefit can apply. A common example of this is a hotel manager who lives adjacent to the hotel that they manage.
A reciprocal agreement involves two employers who agree to extend their services as benefits to the employees of the other employer in a written agreement. In these cases, the employees can claim the benefits as an exclusion on their taxes.
For example, if an airline company agrees to give the employees of a certain hotel chain flights free of charge and, in return, the hotel chain gives the airline employees free lodging at the hotel, then both the airline and the hotel chain can claim the benefits tax free.
Should I Contact an Employment Lawyer?
Yes, it is essential to have the assistance of an experienced employment lawyer or tax lawyer for any tax related employment issues you may have. While there are many different types of tax software available that make it possible for you to do your taxes on your worn, there are sometimes issues with more sophisticated and more complex tax returns. These types of returns may take more time and advice from an attorney.
If you have a dispute with the taxing authority regarding your deductions and exclusions, you may be required to go to court. Your lawyer can help review your taxes and deductions and represent you during any court proceedings, if necessary.