What’s better for employees than a fringe benefit? Try one that’s tax-free.
The IRS recently published the updated Publication 15-B (2017), Employer’s Tax Guide to Fringe Benefits. This guide provides valuable insights into the taxation of statutory benefits and offers some clarifications and additions, including:
- New examples of benefits that can’t be excluded from taxable income as “de minimis” fringe benefits,
- More details about the limits on employee discounts, and
- A new elaboration on when product testing benefits can be excluded as a working condition fringe benefit.
De Minimis Fringe Benefits
Plain and simple, a de minimis fringe benefit is a benefit can be excluded from the employee’s taxable wages (W-2) because the value of the property or service received is so small that accounting for it is unreasonable or administratively impracticable. An essential element of de minimis benefits is that they are occasional or unusual in frequency. They also mustn’t be a form of disguised compensation.
The updated IRS Pub 15-B lists the following as examples of nontaxable de minimis benefits:
- Personal use of an employer-provided cell phone intended primarily for noncompensatory business purposes,
- Occasional cocktail parties, group meals or picnics for employees and their guests,
- Holiday or birthday gifts, other than cash, with a low fair market value, and
- Flowers, fruit or similar items provided to employees under special circumstances (for example, on account of illness, a family crisis or outstanding performance).
To clarify the tax treatment, the updated publication also adds examples of benefits that are not excluded from taxable income, including:
- Season tickets to sporting or theatrical events,
- The value of the use of an employer-provided car or other vehicle to commute for more than one day a month,
- Membership dues at a private country club or athletic facility (regardless of how often the employee uses them), and
- The value of the use for a weekend of an employer-owned or leased facility, such as an apartment, hunting lodge, boat, etc.
In other words, you can serve birthday cake to employees with no tax strings attached, but you can’t give them the keys to your seaside cottage for the Fourth of July holiday weekend without tax consequences.
Employee Discount Benefits
Employee discounts are excluded from an employee’s taxable income if they are for “qualified property or services” provided to an employee or the employee’s spouse or dependent children. Dependent children in this case refers to natural, step and foster children who are either dependents of the employee or whose parents have died and haven’t yet reached age 25. A child of divorced parents is treated as a dependent of both parents.
The discounts are the difference between prices offered to the public and those offered to employees for the same items. “Qualified” services or property are those that are sold to consumers during the ordinary course of business, such as retail merchandise or membership at a gym. Property in this context doesn’t include real estate or personal property held for investment.
There are limits to the tax generosity allowed under the law. Specifically, those limits are:
- For a discount on services, 20% of the price you charge nonemployee customers for the service.
- For a discount on merchandise or other property, your gross profit percentage times the price you charge nonemployee customers for the property.
Protect Testing Benefits
The value of consumer goods provided to employees for product testing outside the workplace is considered a tax-free working condition fringe benefit as long as the testing program meets certain requirements. For instance, if an automaker offers a new model to an employee for evaluation, use of the vehicle can be tax-free to the employee.
The fair market value qualifies as a working condition benefit if all of the following conditions are met — requirements weren’t included in the previous version of IRS Pub 15-B:
- Consumer testing and evaluation of the product is an ordinary and necessary business expense for your business.
- Business reasons necessitate that the testing and evaluation must be performed off your business premises.
- You provide the product for purposes of testing and evaluation.
- You provide the product to your employee for no longer than necessary to test and evaluate its performance.
- The product is returned to you at completion of the testing and evaluation period.
- You impose limitations on your employee’s use of the product that significantly reduce the value of any personal benefit (this includes limiting your employee’s ability to select among different models or varieties of the product and prohibiting its use by anyone other than the employee.)
- The employee submits detailed reports on the testing and evaluation.
- You use and examine the results within a reasonable time.
What Doesn’t Count
The updated publication also explains factors that tend to indicate that a testing program isn’t bona fide. For example:
- It’s a leasing, not testing, program if an employee leases consumer goods for a fee.
- The program can’t be limited to a certain class of employees unless there’s a business reason for doing so.
- The testing exclusion isn’t available to independent contractors or company directors.
Simply put, as long as businesses adhere to the rules, fringe benefits remain tax-free to employees and deductible by employers.
And the Award Goes to . . .
Special rules apply to the tax exclusion for “achievement awards” given to employees for length of service or safety.
Under the IRS guidelines, these awards:
- Can’t be disguised wages,
- Must be awarded as part of a meaningful presentation, and
- Can’t be cash, cash equivalent, vacation, meals, lodging, theater or sports tickets, or securities.
There are additional requirements and dollar limits for achievement award plans. The most recent details are available in IRS Publication 5137, Fringe Benefit Guide.