Tax Treatment of Employer-Provided Benefits
Employer-provided benefits are commonly referred to as “fringe” benefits. These benefits can include a wide variety of perks related to your employment. For example, some employers may provide the following benefits:
- Use of a company car
- Discounts on services
- Membership to clubs
- Dues for professional associations
- Tickets to sporting events
From a tax perspective, these benefits or perks should most times be included in your gross income. The amount that should be included is the fair market value of each benefit (aside from anything paid for by the employee).
Certain benefits are not included in an employee’s gross income, including:
Exceptions to the Taxation of Employer-Provided Benefits
There are a number of exceptions to the rule that an employee must include benefits in his or her gross income. Perhaps the most well-known exclusion is the de minimis benefits exclusion.
Under the de minimis benefits exclusion, perks of minimal value that your employer provides will not be included in your gross income. These include some of the most common benefits that an employee may enjoy. For example, you will not have to include the following benefits in your gross income:
- Small holiday gifts (note, gift certificates are generally not considered de minimus, but it may depend on the value of the gift card)
- Occasional meal money or transportation expenses related to working overtime
- Occasional snacks, such as coffee and donuts
- Small gifts for special circumstances, such as flowers, fruit baskets, books, etc.
- Occasional personal use of the photocopier
- Personal use of a cell phone that is provided primarily for business purposes
The IRS points out that in determining whether something is de minimus, you should consider how often it occurs and the value of the benefit. Although the IRS has not set a specific dollar amount for de minimis benefits, the IRS has determined in at least one case that a benefit with a value of over $100 could not be considered de minimus.
Other exceptions to the general rule that benefits must be taxed include:
- Achievement awards
- Certain athletic facilities
- Education assistance
- Employee discounts
- Group-term life insurance coverage (under $2,000 value)
- Employee stock options
- Retirement planning services
- Commuting (transportation) benefits
- Tuition reduction
- Adoption assistance
- Dependent care assistance
Each of these benefits has very specific rules regarding limitations and other requirements. For example, for an achievement award to be excluded from gross income, it must be actually awarded as part of a meaningful presentation. The award cannot be in the form of cash or cash equivalent (gift cards), lodging, meals, vacations, event tickets, or securities. The award also cannot be considered “disguised” wages. That is, your employer cannot give you an “award” of all or a portion of your wages so that you can avoid a tax.
In most instances, employers will include taxable benefits on an employee's W-2 form so that employees are not left to keep records of the information themselves.
Q&A: What job-related expenses are tax deductible?
When you're an employee with out-of-pocket work expenses, these expenses may be deductible if you itemize rather than claim the standard deduction. The following are work-related expenses which may be eligible to be deducted if they are not reimbursed by your employer.
- Transportation: You can't deduct regular commuting costs, but you can deduct costs when traveling somewhere besides home or the office for your business. If you normally telecommute but need to go to the office for a temporary reason, you can also deduct those expenses.
- Entertainment: You can also deduct some business-related entertainment and gift expenses, although there are strict limitations on these categories.
- Clothing: If you are required to wear a uniform to work and it is not provided by the employer this is most often deductible.
- Professional Groups & Education: Dues for unions or professional groups, education that's related to your job, trade licensing fees, and professional journal subscriptions are deductible.
Itemizing your deductions can help you to recover the cost of these out-of-pocket expenses. Remember, you can only claim these expenses if your employer does not reimburse you.