The federal income tax rules treat all salary and wages you earn at work as taxable compensation that must be reported on your tax return. But if your employer provides you with fringe benefits, which are property and services you receive free of charge, they may need to include their values on your W-2 if it doesn’t qualify as a tax-free fringe benefit. As a result, the income section of your tax return could report more than just cash wages and salary.
General Benefit Rules
As a way of retaining valuable employees, employers commonly offer an array of fringe benefits, like use of a company car and product discounts. The Internal Revenue Service treats all fringe benefits you receive from an employer as taxable compensation for your services unless the tax law specifically excludes it, in which case, it’s a tax-free fringe benefit.
Tax-Free Fringe Benefits
There are a limited number of fringe benefits that are eligible for the exclusion from taxable compensation. Potentially tax-free fringe benefits include health and accident benefits; athletic facilities; achievement awards; financial assistance for school, dependent care and adoption; employee discounts; stock option grants; group term life insurance premiums; meals and lodging provided on your employer’s premises; tuition reductions; commuter subsidies; reimbursements for job-related moves; retirement planning services; employer-provided cell phones; products and services that the employer won’t incur additional costs for; and working condition benefits – which includes any expense that an employee could deduct on their return if paid for out-of-pocket. Lastly, any type of “de minimis” benefit you receive will be considered tax-free. De minimis benefits refer to any service or property that have minimal value and are given to employees infrequently.
The IRS limits the value of each fringe benefit that a single employee can receive tax-free. For example, a maximum of $5,250 in educational assistance is eligible for tax-free treatment per year. If your employer provides you with $6,000 to help pay for school, $750 of it is treated as taxable compensation that must be reported on your tax return. Moreover, tax-free treatment also depends on certain conditions being met by your employer. For example, the tax law allows employers to provide employees with free access to gym facilities without having to include the value in taxable compensation. However, in order to qualify as a tax-free fringe benefit, the gym must be located on property that is owned or leased by the employer.
Valuing Fringe Benefits
When all or part of a fringe benefit is treated as taxable compensation, employers must include the fair market value of the taxable portion on your W-2. Fair market value is the price you’d generally pay in your area for similar services or products – not the expense your employer incurs to provide the benefit.