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When Free Isn’t Free: Your Guide to Fringe Benefits at Work

July 8, 2021, 8:46 AM

The headlines were abuzz last week as the Trump Organization’s CFO Allen Weisselberg and the Trump Organization pleaded not guilty to state tax charges. The 15-felony count New York State indictment included allegations of criminal tax fraud, scheme to defraud, conspiracy, and falsifying business records.

This is not a summary of those charges. You can find excellent explanations of those here and here.

But I have been asked—repeatedly—to offer my “take” on the charges. While I have read the indictment, I haven’t seen any related tax returns, nor have I examined the Trump Organization’s books. My “take” would necessarily be flawed without that information.

That’s because facts and circumstances matter. Drawing conclusions based on a few details can be dangerous. For example, if I told you that Philadelphia Phillies pitcher Aaron Nola struck out ten straight New York Mets players in one game last month, tying Tom Seaver’s MLB record from 1970, you might assume the Phillies won that game. They did not.

That said, there are many issues relating to employee compensation and fringe benefits that can be confusing for ordinary taxpayers like you and me. Even former President Donald Trump questioned the taxability, declaring at a Florida rally, “They go after good, hard-working people for not paying taxes on a company car.” Trump added, “I don’t even know. Do you have to? Does anybody know the answer to that stuff?”

As it turns out, there are folks who are paid to know those answers, including human resources and tax professionals. If you have questions about your benefits, they are good folks to turn to. But for now, here are answers to some of those questions raised by some of the headlines.

What is a fringe benefit?

Simply put, fringe benefits are add-ons offered to an employee in addition to their stated salary. The word “fringe” can feel like a loaded word, so we often just call them benefits.

Is it illegal to receive fringe benefits?

Not all at all—some may even be required by law (more on that in a moment). However, the failure to appropriately report taxable fringe benefits as income may be illegal.

Wait, what kinds of fringe benefits are required by law?

We tend to think of fringe benefits as something extra, provided by your employer on a voluntary basis, but the term really just means over and above your salary. That includes benefits your employer may be required by law to provide.

A good example is the Family and Medical Leave Act, which requires public agencies, public and private elementary and secondary schools, and companies with 50 or more employees to offer weeks of unpaid, job-protected leave per year. Some states and municipalities may require that certain employers provide paid family and medical leave.

What are examples of other kinds of fringe benefits?

Easy examples of fringe benefits include paid holidays and paid time off. Other fringe benefits include life and disability insurance, savings accounts like Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs), and retirement benefits such as company 401(k) plans and stock options.

Fringe benefits can be relatively modest, like free meals, free coffee, cell phones, and gym passes. And that 15% company discount that I used to get when I worked at Gap? Also a fringe benefit.

Fringe benefits can also be substantial, like the use of company cars, vacation spots, and private jets. Corporate housing is also a fringe benefit: I once had a client whose head chef demanded a penthouse apartment in the city as part of his contract. The sky is pretty much the limit.

Do I have to pay tax on all of my fringe benefits?

This is where things get tricky. Here’s your rule of thumb: A fringe benefit is taxable unless the law specifically excludes it (or if the employee pays for the value of the item).

What are some examples of tax-free fringe benefits?

Some benefits are administered under a Section 125 or cafeteria plan. A cafeteria plan allows employees to opt in to qualified benefits on a pretax basis. Qualified benefits include certain accident and health benefits, adoption assistance, dependent care assistance, group-term life insurance coverage, and health savings accounts, including distributions to pay long-term care services.

Other fringe benefits are expressly excluded from tax by statute. The most well-known are healthcare benefits, including health, dental, and vision insurance, and some healthcare-related expenses. If those benefits are paid by the employer, they are tax-free.

Also excludable? Tuition reimbursement and related educational expenses up to $5,250 tax-free each year, employee discounts (up to 20%), in-house gyms, some meals, and transportation benefits.

There are also de minimis perks. The Latin phrase translates roughly to “of little importance.” When it comes to taxes, a de minimis benefit is so small as to make accounting for it unreasonable or impractical. As a result, those benefits—like a fruit basket—are excluded from income under Section 132(a)(4). Other examples include personal use of an employer-provided cell phone, low-value holiday or birthday presents, parties or picnics for employees and their guests, and occasional tickets for theater or sporting events.

And those benefits aren’t just federal income-tax free—they are also not subject to Social Security and Medicare taxes.

Be careful: Cash and cash equivalent fringe benefits (for example, gift certificates, gift cards, and the use of a charge card or credit card), no matter how small, are never excludable.

Whose job is it to report fringe benefits?

Typically, the burden falls to the employer: Taxable fringe benefits must be included on an employee’s Form W-2 each year.

If some fringe benefits are taxable, why offer them in the first place?

To start, competition and loyalty. Employees are attracted to companies that provide benefits beyond that of their competitors. And clients and customers like patronizing establishments that treat their employees well. Excellent benefits are generally considered—appropriately or not—a sign of a company’s financial well-being.

Can my employer pay the tax due on my fringe benefits?

Yes, that payment is sometimes referred to as a gross-up. If I know that my benefit will result in an extra $3,000 in tax, I might negotiate an additional $3,000 as part of my contract. But—and here’s the complicated part—the gross-up payment is also taxable. It can easily turn into a hamster wheel, so be sure to do the math.

What if a perk is a gift?

The good news: Gifts aren’t subject to income tax. The not-so-good news: The general rule is that an employer cannot make a gift, as it’s almost always considered compensation. This is true even if the gift is not from the company but from the owner of the company. For example, if I gave my paralegal a car, the IRS would typically consider that compensation, even if it didn’t come from my law firm. The idea is that our relationship is tied to the employment relationship.

The Supreme Court has generally confirmed this treatment, ruling in Commissioner v. Duberstein that a tax-free gift must be made through “detached and disinterested generosity,” or “out of affection, respect, admiration, charity or like impulses.” In Larsen v. Commissioner, the court ruled that a payment was “motivated by business exigencies” and therefore, not a tax-free gift.

The bottom line

This quick look at what’s taxable—and what’s not—isn’t meant to be exhaustive. It does, however, provide some general guidance. It’s a good idea to assume that most perks over and above your salary are includable in your taxable income unless your employer clearly states otherwise. If you’re not sure, seek out your HR or benefits person and ask.

This is a weekly column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.

To contact the reporter on this story: Kelly Phillips Erb in Washington at kerb@bloombergindustry.com

To contact the editors responsible for this story: Rachael Daigle at rdaigle@bloombergindustry.com; Yuri Nagano at ynagano@bloombergtax.com