Offering fringe benefits can help boost morale and retention amongst your team and give you the upper hand when competing for talent in today’s competitive employer landscape. However, it’s important to understand what these benefits are and how they work in order to avoid unnecessary surprises at tax time.
What Exactly is a Fringe Benefit?
Fringe benefits are a form of perks or extra compensation provided by employers to employees for the performance of services beyond an employee’s normal rate of pay. Some fringe benefits are offered to all employees, while others are available only to certain categories of employees.
Fringe benefit payment may be in the form of property, services, cash, or cash equivalents (like savings bonds). It can also be intangible, such as life insurance or the use of a company car.
Fringe benefits are deductible if the goods, services, or facilities are treated as compensation to the recipient and reported on Form W-2 for an employee or Form 1099-NEC for an independent contractor. Special rules apply if the benefit recipient is an officer, director, or beneficial owner — directly or indirectly — or other specified individuals.
Examples of Fringe Benefits
Meals and Lodging:
Employers can generally deduct 50% of certain meal expenses and 100% of certain lodging expenses provided to employees.
If the amounts are deductible, employers will want to deduct the cost in whatever category that the expense falls.
The full cost of the following meals can be deducted:
- Meals you provide to employees at a work site where you operate a restaurant or catering service
- Meals you provide employees as part of recreational or social activities you offer
For food and beverage expenses that are incurred with entertainment expenses, you are not allowed a deduction for any item considered to be entertainment, amusement, or recreation. If you provide food and beverages during an entertainment activity, the food cost must be separate from the entertainment costs, and then you may deduct up to 50% of the bill. Thanks to the taxpayer Certainty and Disaster Tax Relief Act of 2020, a temporary 100% deduction is provided until January 1, 2023.
Transportation (Commuting) Benefits:
Under the Tax Cuts and Jobs Act of 2017, transportation provided via commuter highway vehicles, transit passes, or qualified parking is no longer deductible. No deduction is allowed for any expense incurred for transportation, reimbursement, or in connection with travel to work except as necessary to ensure employee safety or for qualified bicycle commuting reimbursement.
Employee Benefit Programs:
For employee benefits like health, life, and accident plans, cafeteria plans, education assistance, adoption assistance, dependent care assistance, and welfare benefit funds, you can generally deduct these expenses from whatever categories they fall into. However, you can not deduct life insurance for any person with a financial interest in your business if they’re a direct or indirect beneficiary of the policy. For welfare benefit funds, deductions for contributions are limited to the fund’s qualified cost for the tax year. If your contributions are greater than the fund’s qualified cost, carry the excess over to the next tax year.
For More Info on Fringe Benefits
This article provides just a quick summary — many other exceptions and provisions exist. Laws and regulations can be complicated and change with little notice, so it’s important to stay up to date and ensure you remain compliant. Be sure to consult the IRS’ Fringe Benefit Guide for in-depth info and seek professional advice to ensure your benefits are reported and taxed properly.