Fringe Benefit Overview from the IRS
The IRS considers fringe benefits to be a form of pay (not money) for the performance of services. An example could be allowing an employee to use a company vehicle to go travel between home and work. The services performed do not need to be provided by an employee. It can be an independent contractor, partner, or director.
Who is the provider of a fringe benefit?
You would be considered the provider of a fringe benefit if services are provided for you. You would also be the provider if a third party provides services to one of your employees engaged in working for you. An example given by the IRS in Publication 15-Bi is a daycare business providing daycare services for your employee. Even though the service is provided to the employee directly by the daycare business, you would be considered the provider.
Who is the recipient of a fringe benefit?
Whomever is providing the services to you is considered the recipient of a fringe benefit provided for those services. An employee does not necessarily have to provide the services, as if a member of their family does so, the employee would be considered the recipient of the fringe benefit.
Are Fringe Benefits Taxable?
Unless the law specifically excludes it, any fringe benefit you provide is taxable and must be included in the recipient’s pay. You must include in the pay to a recipient the amount by which the value of the benefit exceeds the sum of the following:
- Any amount excluded from pay by the law.
- Any amount paid for by the recipient for the benefit.
If the recipient of the taxable fringe benefit is your employee, the value of the benefit is generally subject to employment taxes and reported on their Form W-2. There are special rules that can allow you to use special rules to withhold, deposit, and report the employment taxes. They are complicated and should be discussed with your tax services provider or accountant.
If the recipient of the fringe benefit is not an employee, the value of the benefit is not subject to employment taxes, but, unless excluded, must be reported on a Form-1099 or Schedule K-1.
A Cafeteria Plan allows participants an opportunity to receive qualified benefits on a pre-tax basis. This is a written plan that allows an employee to choose between receiving cash or taxable benefits instead of qualified benefits excluded by law.
A cafeteria plan can include the following benefits:
- Most accident and health benefits.
- Adoption assistance.
- Dependent care assistance.
- Group term life insurance coverage.
- HSAs, Health Savings Accounts. HSA distributions may be used to pay eligible long term care insurance premiums or to pay for qualified long term care services.
Benefits Not Allowed
A cafeteria plan cannot include the following:
- Archer MSAs.
- Athletic facilities.
- De minims (minimal) benefits.
- Educational assistance.
- Employee discounts.
- Employer-provided cell phones.
- Lodging on your business premises.
- No-additional-cost services.
- Retirement planning services.
- Transportation (commuting) benefits.
- Tuition reduction.
- Working condition benefits.
This has been a broad overview of fringe benefits and their reporting and taxation. Always consult with your tax advisor or accountant.