The idea of giving employees work-related benefits and discounts is very common throughout the United States. If specific requirements are met, employers may offer Code Sec. 132 “fringe benefits,” such as using the company’s tickets to sporting events or using a company vehicle on a tax-free basis.
To see if your benefits qualify as a Code Sec. 132 fringe benefit, see IRS Publication 15-B (Employer’s Tax Guide to Fringe Benefits).
Under Code Sec. 132, there are basic types of benefits, each with their own sets of rules that must be followed if the benefit is to receive favorable tax treatment. Some of the following benefits are subject to nondiscrimination rules, meaning that an employer cannot favor higher-paid employees. Knowledge of the rules specific to each type of benefit is crucial, because noncompliance might result in penalties on the employer for under-withholding income and penalties on the employees for underreporting income. The following are eight basic types of fringe benefits.
No-additional-cost Services: These benefits are services that are provided tax-free to employees when there is no additional cost to the employer. They are typically offered to employees free of charge or at a reduced rate by the employer and include the services that the employer’s line of business sells to the public. These occur frequently in industries with excess capacity services. Examples include:
- Transportation tickets
- Hotel rooms
- Entertainment facilities
- Recreation facilities
Working Condition Fringe Benefits:Qualified Employee Discounts: This type of fringe benefit allows an employee to obtain property or services from the employer at a price below that available to the general public. For example, many public municipalities have park districts that offer a variety of amenities to the public such as swimming pools, fitness and weight room facilities and golf courses; a qualified employee discount would allow employees to use these amenities at a lower cost.
If an employee pays for property or services that qualify as a working condition benefit, the employee can deduct them from his or her individual tax income return. Examples include:
- Use of a company car for business
- Job-related education provided to an employee
If the cost of an item is deductible as a business expense and is provided by the employer, it may be excluded from the employee’s wages as a working condition fringe benefit. General rules for working condition fringe benefits include:
- Benefit must relate to the employer’s business
- Employee would have been entitled to an income tax deduction if the benefit was bought as a personal expense
- Business use must be substantiated with records
De Minimis Fringe Benefits: These benefits include property or services, provided by an employer for an employee, with a value so minimal that accounting for it is unreasonable or administratively impractical. The value of the benefit is determined by how often it is provided. Examples include:
- Group meals, employee picnics
- Theater or sporting event tickets
- Coffee, doughnuts or soft drinks
- Flowers or fruit for special circumstances
- Birthday or holiday gifts (not cash)
Qualified Transportation Fringe Benefits: These include benefits an employer provides to employees for the employee’s personal transportation, such as commuting to and from work. Examples include:
- Commuter transportation in a commuter highway vehicle
- Transit passes
- Qualified parking
- Qualified bicycle commuting expenses
Educational Reimbursements and Allowances: These include payment or reimbursement for education expenses incurred during employment.
Qualified Moving Expense Reimbursements: These refer to moving expenses reimbursed directly or indirectly by an employer if:
- The individual is an employee
- The employee incurs or pays the expenses
- The expenses are closely related to starting work at a new job location (generally, moving expenses incurred within one year from the date employee first reports to work at the new location)
- Expenses meet time and distance tests
Allowable expenses include:
- Moving household goods and personal effects
- Travel costs between the former and the new residence by the shortest and most direct route
Qualified Retirement Planning Services: If the employer maintains a qualified retirement plan, any qualified retirement planning services provided to an employee and his or her spouse may be excluded from the employee’s wages. This includes any retirement planning advice or information provided by the employer.
Source: IRS Publication 15-B (Employer’s Tax Guide to Fringe Benefits)