How Fringe Benefits are Treated for Federal Income Tax Purposes

Generally, all income is subject to federal tax. While the Internal Revenue Code (IRC) does not specifically define income, gross income is usually defined as all income from whatever source derived. Under section 132 of the IRC, however, certain fringe benefits provided by an employer to an employee are excluded from the employee’s gross income for federal income tax purposes. Thus, the taxpayer does not have to pay income tax on these benefits. The following fringe benefits are excluded under section 132: no-additional-cost services; qualified employee discounts; working condition fringes; de minimis fringes; qualified transportation fringes; and qualified moving expense reimbursements.

A no-additional-cost service is defined as a service an employer provides to an employee for use by the employee if the service is offered for sale to customers in the ordinary course of business in which the employee is engaged and the employer does not incur substantial additional cost in providing the service. Transportation, hotel accommodations and telephone services provided by an employer are no-additional-cost services that are typically excluded from the recipient employee’s income. It does not matter whether the employer provides the no-additional-cost service at a reduced price, free of charge or through a cash rebate (full or partial) of the amount the employee paid for the service.

The qualified employee discount exclusion applies where the employer provides qualified property or services to employees at a price that is lower than the price for which the employer offers the property or services to customers. Qualified property or services includes any property or services that the employer offers for sale in the ordinary course of business in which the employee performs substantial services. An example of this is a retail store that offers its employees 10% off the purchase price of goods that are offered to customers.

Working condition fringe refers to any property or service provided to an employee where, if the employee paid for it, the payment would be deductible under sections 162 or 167 of the IRC. The employee can exclude from his or her gross income the fair market value of working condition fringe benefits.

De minimis fringe is any property or service provided by an employer to an employee with a value that is so small so that accounting for it is unreasonable or administratively impractical. In determining if something is de minimis fringe, the frequency with which the employer provides similar fringes to his or her employees must be considered. Any fringe benefit that qualifies as a de minimis fringe is not included in gross income. Regulation 132-6(e)(1) lists the following as de minimis fringes that are excluded from gross income: coffee, doughnuts and soft drinks; occasional cocktail parties or group meals for employees and their guests; traditional birthday or holiday gifts (except cash) with a low fair market value; occasional tickets to sporting events or the theater; flowers or similar property given to employees under special circumstances such as illness, a family crisis or excellent performance; and local telephone calls.

Qualified transportation fringe refers to any of the following provided by an employer to an employee: (1) transportation in a commuter highway vehicle that is in connection with travel between the employee's residence and place of employment; (2) transit passes; and (3) qualified parking. In order to exclude the qualified transportation fringe benefits provided by an employer to any employee from gross income the amount may not exceed $65 per month for commuting costs and $175 per month for parking. If available, the qualified transportation fringe should be paid in the form of a voucher for a transit pass.

A qualified moving expense reimbursement is any amount an employer gives an individual employee (directly or indirectly) as payment for, or a reimbursement of, expenses which could be deducted as moving expenses under section 217 of the IRC if the individual paid them directly.

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