How Are an Employee’s Fringe Benefits Taxed?

Common fringe benefits provide employees with compensation above and beyond their wages or salaries.

A wide range of fringe benefits is offered by employers. These include health insurance premiums, child care, transportation vouchers, and retirement-account matching contributions.

To take advantage of an employer’s fringe benefits in the most effective way, employees need to understand how common fringe benefits are taxed.

Key Takeaways

  • Fringe benefits such as life insurance, tuition assistance, and employee discounts are perks that companies give their employees above and beyond normal compensation.
  • Fringe benefits such as bonuses or reimbursements that are paid in cash are likely to be subject to income tax.
  • Benefits received in-kind are usually not subject to taxation.
  • Employers often provide other employee benefits such as health plans, unemployment insurance, and worker’s compensation.
  • Taxable fringe benefits are reported on an employee’s W-2.

What Are Some Taxable Fringe Benefits?

Fringe benefits are generally considered taxable income if the employer pays them to their employees in cash. So bonuses or reimbursements for expenses paid while on the job are considered taxable. These benefits must be included on an employee’s W-2 each year, and the fair market value (FMV) of the bonus is subject to withholding.

The most common fringe benefits that are considered a taxable part of total compensation include:

  • Reimbursements for mileage expenses that exceed the limitations provided by Internal Revenue Service (IRS) guidelines
  • Reimbursements of education or tuition expenses that are not directly related to job performance or are more than the stated IRS limits
  • Perks that fall under the working conditions benefit category if used outside of business, such as a mobile phone or company car

Mileage

For taxpayers who claim a mileage deduction, the standard mileage rate for business use is 65.5 cents per mile in 2023. The rate increases to 67 cents per mile in 2024. Any amount that exceeds this limit is considered taxable as income. For example, for tax year 2023, if a company reimburses its employee 70 cents per mile, then the remaining five cents per mile is taxable.

Education

Employers can exclude up to $5,250 from an employee’s wages for education-related assistance provided that assistance was offered under a qualifying program. Amounts exceeding this threshold are taxable as ordinary income.

Moving expenses can only be claimed if you are “on active duty and, due to a military order, you move because of a permanent change of station,” according to the IRS.

Which Fringe Benefits Are Excluded From Taxation?

There is a lengthy list of common fringe benefits that are excluded from an employee’s taxable compensation.

In-Kind

In-kind payments, which means the employee gets the benefit in lieu of cash, are non-taxable. So someone who receives accommodations from their employer so they can do their job won’t be taxed for that benefit.

De Minimis

Another type of benefit that isn’t taxed is called a de minimis benefit. This type of benefit is one that holds such a minimal value that employers would have a difficult time accounting for it.

For instance, a gift card given to an employee for a holiday or birthday is considered a de minimis benefit, as are refreshments or snacks provided during a business meeting.

Meals

Meals are not considered a taxable fringe benefit for employees, although certain qualifications must be met. Employers buying lunch or dinner for employees must provide the meal on business grounds, and it must be offered as a benefit to the employee.

This means a meal could be a tax-free benefit to employees when offered during a lengthy meeting or during required overtime.

Other

Other fringe benefits that are not considered taxable to employees include:

  • Health insurance (up to a maximum dollar amount)
  • Dependent care
  • Retirement planning services
  • Adoption assistance
  • Group term life insurance
  • Qualified benefits plans such as profit sharing or stock bonus plans
  • Commuting or transportation benefits
  • Employee discounts
  • Working condition benefits that are only used for business purposes

Awards given for achievements are exempt from tax withholding and are also deemed not taxable.

Remember: Taxes for the current year are filed in the following year. That means that you file 2023 taxes in 2024 and 2024 taxes in 2025.

Taxation of Government-Sponsored Benefits

You may be wondering about the tax status of certain government-sponsored benefits like unemployment and workers’ compensation.

Unemployment Insurance

Unemployment insurance (UI) is taxable at the federal level but not every state imposes a tax on this benefit. UI temporarily provides unemployment benefits to certain workers who lose their jobs.

To qualify, the worker must not have caused the job loss, must have worked for a specific period and earned a certain amount as determined by their state of residence, and be actively looking for employment.

Worker’s Compensation

Worker’s compensation is exempt from taxation at the federal or state level as long as the benefits are received “for an occupational sickness or injury.”

The program, which is organized under the Department of Labor’s Office of Worker’s Compensation Programs, provides compensation to federal workers who are injured at work or acquire a disease from work. Benefit recipients are compensated with money, medical treatment, vocational rehabilitation, or other benefits.

In addition to these government-sponsored programs, some employers offer health plans—one of the most desired benefits—to their employees. Companies that fund their employees’ health insurance plans do not have to withhold Social Security, Medicare, FUTA, and federal income taxes from that benefit.

How Much Are Fringe Benefits Taxed?

Fringe benefits may be taxed at the employee’s income tax rate, or the employer may elect to withhold a flat supplemental wage rate of 22% on the benefit’s value. If the value of benefits exceeds $1 million in a year, the supplemental wage rate is 37%.

Are Some Fringe Benefits Not Taxed?

The IRS allows several fringe benefits to be excluded from taxes. This list includes (but is not limited to) adoption expenses, group-term life insurance, retirement planning services, and de minimis benefits, such as certain meals and employee parties.

Are Fringe Benefits Included in Gross Income?

Most fringe benefits are included in an employee’s gross income. As such, they are subject to withholding and employment taxes. The employer records the amount “by which the fair market value of the benefits is more than the sum of what the employee paid for it plus any amount that the law excludes.” Not all fringe benefits are taxable, which means that they are excluded from an employee’s gross income. The IRS has a full list of exclusions available through its website.

Are Taxable Fringe Benefits Included on a W-2?

Yes, taxable fringe benefits are reported on an employee’s W-2. These are included under wages, tips, and other compensation in the total in box 1 of the form. Although not required, employers may also choose to include the total in box 14 (marked Other) or on a separate sheet.

The Bottom Line

Employers offer a wide range of fringe benefits as a recruitment or retention strategy. These benefits can make up a substantial portion of an employee’s total compensation.

To fully compare the benefits packages offered by employers, it is important to understand how common fringe benefits are taxed.

Leave a Comment

Your email address will not be published. Required fields are marked *