CLIENT KNOWLEDGE BASE

    A Guide to Fringe Benefits

    At Anomaly we often get asked questions of whether a certain benefit can be given to team members tax fee.

    Fringe benefits are non-wage compensations provided to employees (and sometimes to owners) in addition to their regular salaries or wages. These benefits can range from health insurance and retirement plans to company cars and meals provided during business travel. The tax implications of these benefits depend on whether they are classified as taxable or nontaxable.


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      Nontaxable Fringe Benefits

      Nontaxable fringe benefits are those that the Internal Revenue Service (IRS) excludes from an employee’s taxable income. Employers do not need to withhold payroll taxes on these benefits, which can make them a valuable component of overall compensation.

      Common Examples of Nontaxable Fringe Benefits 

      • Health Insurance: Employer-provided health, dental, and vision insurance typically qualify as nontaxable benefits.  This is the most common one we see.
      • Group Term Life Insurance: Up to $50,000 of group term life insurance coverage is generally nontaxable.
      • Dependent Care Assistance: Up to $5,000 can be provided for dependent care and can be excluded from taxable income.
      • Educational Assistance: Employer payments of up to $5250 for certain educational programs AND student loan interest may be provided tax free!
      • Working Condition Benefits: Items such as business-related travel expenses, professional development, parking, transit passes can be provided tax free (up to IRS limits which do change from time to time with inflation). 
      • De Minimis Benefits: Low-value benefits, like occasional meals, holiday gifts, or small bonuses, that are impractical to account for may be excluded as well, but these must be reasonable! 
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      Taxable Fringe Benefits

      Taxable fringe benefits are those that must be included in the employee’s taxable income. Employers must withhold income taxes, Social Security, and Medicare taxes on the value of these benefits.

      Common Examples of Taxable Fringe Benefits

      • Bonuses (Cash or noncash): Cash bonuses, gift cards given as bonuses, or other monetary awards are typically taxable per IRS rules.  
      • Personal Use of a Company Provided Car: If an employee uses a company car for personal purposes, the value of that personal use is generally considered taxable income. This is often surprising to the employee from our experience so it is best to inform your team they will be taxed on the Personal Usage. 
      • Non-Qualified Life Insurance: Amounts above the $50,000 threshold for group term life insurance are taxable.
      • Club Memberships: Payments for gym memberships or golf/social club dues are taxable unless they are directly related to the performance of the employee's job.  It is RARE the IRS allows this.  
      • Employee Discounts: If the discount provided exceeds the cost to the employer, the excess benefit is taxable per IRS rules.  
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      Owners and Nontaxable Benefits?

      • Employee vs. Owner Status: Benefits provided to owner-employees who own more than a specified percentage of the company (usually 2% or more in closely held corporations) may not be treated the same as benefits provided to non-owner employees.
      • Health Insurance: While health insurance premiums paid on behalf of a 2% or greater shareholder in an S corporation are typically included in their wages, the shareholder will be eligible to deduct these premiums on their individual tax return.
      • Discrimination Rules:Benefits that are available to all employees on a nondiscriminatory basis are more likely to be treated favorably for tax purposes.  In other words, you cannot simply benefit yourself as owner OR your family members over the employees. 
        • If owners receive special benefits not available to rank-and-file employees, those benefits may be fully taxable.
      • Controlled Groups: You cannot circumvent these rules by setting up a side entity!  The IRS simply groups all like kind businesses together (whether intention OR unintentional) 
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      Examples

      Example 1: Nontaxable Benefit

      An employer provides health insurance to all employees. Since the premiums are paid directly by the employer and meet IRS guidelines, they are excluded from the employees’ taxable income. This benefit is extended to both regular employees and owner-employees, although the owner may need to follow additional reporting procedures (especially in S Corps). 

      Example 2: Taxable Benefits

      A company offers a company car to an employee. The car is primarily used for business, but the employee also uses it for personal trips and takes it home on the weekends. The IRS requires that the value of the personal use portion be calculated (using methods such as the lease value method or cents-per-mile rule) and included in the employee's taxable income. 

      Example 3: Special Considerations for Owner’s Fringe Benefits

      An S corporation pays for its 8% owner’s health insurance premiums. Although the premiums are initially included in the owner’s W-2 wages as taxable income, the owner will eventually get to deduct this as SEHI on their 1040 as well.

      Fringe benefits can be confusing!  At Anomaly, our high growth business owners are always looking to add in valuable fringe benefits for their team.  It is important to inform the team about the potential taxability of these fringe benefits and ensure you as the owner are well aware of how the benefit may or may not affect you!
    If you still have a question, we’re here to help. Contact us