De Minimis or Not Di Minimis: Which Employee Benefits are Taxable?

Every business owner knows that money is not always the key factor that attracts candidates to a company. Of course, the salary is important, but oftentimes, the fringe benefits offered by a company are what really helps to draw and retain talent in the organization. Fringe benefits are defined by the IRS as a “form of pay for the performance of services.” In many cases, these are non-monetary benefits offered to employees. 

Fringe Benefits

Fringe benefits may take on many forms, and can include things like the use of athletic facilities, education assistance, meals, lodging, and more. It’s important to understand that not all benefits will be treated the same way for purposes of income and taxation. Generally speaking, unless there are exclusions specifically defined by the IRS, fringe benefits are subject to federal income, social security, and Medicare taxes, and the value should be reported in boxes 1, 3, and 5 of the form W-2. Some benefits, such as education assistance, have set limits that determine what, if any, portion of the benefit is taxable or not.

What are De Minimis Fringe Benefits?

De minimis fringe benefits are those benefits that are deemed to have so little value that accounting for the cost of the benefits would be “administratively impracticable.” This might include the occasional personal use of a company printer or copying machine, small (non-cash) gifts for birthdays or special occasions, and occasional parties or celebrations for employees and their guests. However, cash and gift cards, regardless of value, are never de minimis. Many companies mistakenly set arbitrary dollar limits to what constitutes a de minimis benefit and can find themselves in trouble if awards or gifts of cash or gift cards go unrecorded and untaxed.

Working condition benefits are also excluded from taxable income. Working condition benefits are usually property or services provided to an employee so that they are able to perform their job. Examples include use of a company vehicle for business purposes, job-related education expenses, or a company-provided cell phone to be used primarily for business purposes.

Other common benefits that qualify for exclusion from taxable income include flexible spending arrangements (FSAs) for health or dependent care, company sponsored group-term life insurance (up to $50,000 in coverage), and the use of an on-premise or company owned and operated athletic facility.

Avoid These Issues by Using a Payroll Services Professional

The IRS provides detailed descriptions and a complete list of qualified exclusions in Publication 15-B. Mistreatment of fringe benefits is a very common occurrence in many companies and is something that can easily go unnoticed for months or even years. The payroll and compliance experts at Valor Payroll Solutions can help to make sure your business is treating these and other fringe benefits correctly and save your company from costly audits and amendments due to misclassification of taxable and non-taxable items. Contact us today! 

 

More To Explore