Insight

Providing fringe benefits to employees with no tax strings attached

Providing fringe benefits to employees with no tax strings attached | tax accountants in baltimore city | Weyrich, Cronin & Sorra

Businesses can provide benefits to employees that don’t cost them much or anything at all. However, in some cases, employees may have to pay tax on the value of these benefits.

Here are examples of two types of benefits which employees generally can exclude from income:

  1. A no-additional-cost benefit. This involves a service provided to employees that doesn’t impose any substantial additional cost on the employer. These services often occur in industries with excess capacity. For example, a hotel might allow employees to stay in vacant rooms or a golf course may allow employees to play during slow times.
  2. A de minimis fringe benefit. This includes property or a service, provided infrequently by an employer to employees, with a value so small that accounting for it is unreasonable or administratively impracticable. Examples are coffee, the personal use of a copier or meals provided occasionally to employees working overtime.

However, many fringe benefits are taxable, meaning they’re included in the employees’ wages and reported on Form W-2. Unless an exception applies, these benefits are subject to federal income tax withholding, Social Security (unless the employee has already reached the year’s wage base limit) and Medicare.

Court case provides lessons

The line between taxable and nontaxable fringe benefits may not be clear. As illustrated in one recent case, some taxpayers get into trouble if they cross too far over the line.

A retired airline pilot received free stand-by airline tickets from his former employer for himself, his spouse, his daughter and two other adult relatives. The value of the tickets provided to the adult relatives was valued $5,478. The airline reported this amount as income paid to the retired pilot on Form 1099-MISC, which it filed with the IRS. The taxpayer and his spouse filed a joint tax return for the year in question but didn’t include the value of the free tickets in gross income.

The IRS determined that the couple was required to include the value of the airline tickets provided to their adult relatives in their gross income. The retired pilot argued the value of the tickets should be excluded as a de minimis fringe.

The U.S. Tax Court agreed with the IRS that the taxpayers were required to include in gross income the value of airline tickets provided to their adult relatives. The value, the court stated, didn’t qualify for exclusion as a no-additional-cost service because the adult relatives weren’t the taxpayers’ dependent children. In addition, the value wasn’t excludable under the tax code as a de minimis fringe benefit “because the tickets had a value high enough that accounting for their provision was not unreasonable or administratively impracticable.” (TC Memo 2022-36)

You may be able to exclude from wages the value of certain fringe benefits that your business provides to employees. But the requirements are strict. If you have questions about the tax implications of fringe benefits, contact us.

© 2022

Related Insights

Six tax issues to consider if you’re getting divorced - cpa in bel air md - Weyrich, Cronin & Sorra

Tax Prep, Planning & Strategy

Six tax issues to consider if you’re getting divorced

Divorce entails difficult personal issues, and taxes are probably the farthest thing from your mind. However, several tax concerns may need to…
Are you unfairly burdened by a spouse’s tax errors? You may qualify for “innocent spouse relief” - accountant in alexandria va - Weyrich, Cronin and Sorra

Tax Prep, Planning & Strategy

Are you unfairly burdened by a spouse’s tax errors? You may qualify for “innocent spouse relief”

Navigating the complexities of tax law can be difficult, especially when faced with an unexpected tax bill due to the errors of a spouse or ex-spouse.…
Understanding taxes on real estate gains - tax accountants in washington dc - Weyrich, Cronin and Sorra

Tax Prep, Planning & Strategy

Understanding taxes on real estate gains

Let’s say you own real estate that has been held for more than one year and is sold for a taxable gain. Perhaps this gain comes from indirect…

Connect with us

Use the form below to send us an email. WCS responds directly to all inquiries and general questions within 24 hours of posting.

This contact form is deactivated because you refused to accept Google reCaptcha service which is necessary to validate any messages sent by the form.