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NOTE:
The tax regime applying to all fringe benefits is
highly complex, and professional advice should be
taken before planning any scheme designed to minimise
taxation. These notes are intended simply to give
a general overview and should not be relied upon as
a basis for action in any particular case.
Introduction
The
US Internal Revenue Code excludes nine types of fringe
benefits from taxable income:
1. No
additional cost services are services, normally offered
for sale by the employer to customers in the ordinary
course of business, that are provided to employees
for personal use at no additional cost to the employer.
(Example: free standby flights provided by an airline
to its employees.)
2. Qualified
employee discounts are discounts: (a) on merchandise,
that are not in excess of the gross profit percentage
on regular price sales of the merchandise to customers,
or (b) on services, that are not in excess of 20%
of the regular customer price. (Example: a discount
of 40% on merchandise costing a department store $50
and normally sold for $100 [50% gross profit percentage].)
3. Working
condition fringe benefits are those whose costs, if
borne by the employee, would be deductible as ordinary
and necessary business expenses. (Examples: use of
a company car or airplane for business purposes, benefits
provided for employee safety, on the job training,
and merchandise provided for off site product testing
and evaluation.)
Cash
payments do not qualify as working condition fringe
benefits unless the cash is provided for use in connection
with a deductible business activity, such use is verified
by the employer, and cash not so used is returned
to the employer.
4. De
minimis fringe benefits are those whose value is so
minimal that accounting for the benefits would be
administratively unreasonable or impractical. (Examples:
occasional personal use of copy machines, coffee and
doughnuts, occasional tickets to sporting or entertainment
events, and local telephone calls.)
5. Employer
operated athletic facilities are those located on
the employer's premises, operated by the employer,
and used primarily by current and retired employees
and their spouses and dependent children.
6. Qualified
meals and lodging are those provided on the employer's
premises, for the convenience of the employer, and,
in the case of lodging, required as a condition of
employment. (Examples: lunch provided to employees
who must work during normal lunch hours because of
peak business activity, housing provided to a hotel
manager.)
7. Qualified
tuition reimbursements are payments made, under an
accountable and nondiscriminatory plan, for job related
education that maintains or improves skills required
for the individual's employment or that is required
as a condition of employment. Payments made for education
necessary to meet minimum job requirements or to qualify
the individual for a new trade or business are not
excludable from income.
8. Qualified
employer transportation benefits include up to $230
(2010) per month in mass transit passes or reimbursement
for mass transit or vanpooling expenses, local transit
fares given to employees doing occasional overtime,
cab fares or similar assistance for employees working
in unsafe conditions, and up to $230 per month (2010)
in parking benefits. Allowances for cyclist were introduced
as of 2009 at $20 per month.
9. Qualified
moving expense reimbursements are excludable from
income if: (a) the expenses would be allowed as deductions
by the employee, and (b) the employee did not deduct
the expenses in a prior year. Moving expenses normally
deductible by an employee include the cost of moving
household and personal goods and the cost of travel
between the old and new residences.
There
are some limitations on the above. Highly compensated
employees may not exclude: no additional cost services,
qualified employee discounts, or qualified meals and
lodging from income unless those benefits are provided
in a manner that does not discriminate in favour of
the highly compensated employees.
Other
fringe benefits, including, but not limited to, dependent
care assistance, group term life insurance, medical
and health insurance, legal assistance, death benefits,
and incentive stock options, may be excluded from
taxable income, usually subject to dollar limitations,
if provided to employees under written, nondiscriminatory
plans which adhere to specified formats, rules, and
regulations.
With
few exceptions, taxable fringe benefits are liable
to income tax withholding and payment of social security,
Medicare, and Federal unemployment (FUTA) taxes.
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