Fringe Benefits Aren’t Always “Free” Benefits

Fringe benefits and their tax treatment by prominent executives and others has been highlighted in the current news cycle. Many have pointed to the ambiguity of the term “fringe” and the complicated tax rules to defend their positions on everything from tuition reimbursement to mileage reimbursement. Tax practitioners know that fringe benefits are taxable income unless there is an exception. However, the details can be complicated. While some non-cash benefits are nontaxable, others are taxed at amounts less than fair market value, and still others at fair market value. And, if an employer pays an employee’s debts or makes other payments on behalf of the taxpayer, those will likely be taxable wages. Upon learning of an audit or examination, first review the employer’s treatment of the panoply of fringe benefits that may be provided to an employee and investigate whether, if taxable, proper valuation, withholding, and Form W-2 reporting has been made. In short, all fringe benefits are taxable unless a clear exception applies, so documentation and compliance are key.

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Related Content

• Fringe Benefit Rules (IRC § 132)
  Learn more about what you may already know: many fringe benefits are nontaxable or taxed at reduced amounts.  Can an executive use a company plane for personal use?  It may be taxed below its fair market value. Allocated a company car? Even if used for personal miles, the amount of the non-cash fringe “imputed” to the employee as additional wages may be low (or zero).  Enjoying food in a company cafeteria at subsidized prices. There, too, the reduction may be okay as a nontaxable fringe. Even receiving IRS-prescribed “per diems” from the employer while traveling may be wholly nontaxable. 
• Qualified Employee Discount Programs
  See how, among permissible nontaxable fringe benefits, is the discount employees receive if their employer provides them with a discount on its goods or services (from the price paid by non-employees) while satisfying the qualified employee discount rules of I.R.C. § 132(c).

Practical Guidance Updates
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  • Compensation/Employee Benefits/Payroll. IRS provides guidance on American Rescue Plan Act of 2021 (ARP) changes to the funding rules for single employer defined benefit plans, including on the manner and timing of elections permitted under the ARP. R.S. Notice 2021-48.
  • Excise Taxes and Credits. IRS released employee retention credit guidance for the third and fourth quarters of 2021 indicating that cash tips paid to workers qualify for the credit where used by recovery startup businesses. R.S. Notice 2021-49(amplifying I.R.S. Notice 2021-23 and I.R.S. Notice 2021-20).

• IRS Newsroom: The IRS has issued a practice unit on the deduction available for domestic corporations under R.C. Section 250 for foreign-derived intangible income (FDII) and global intangible low-taxed income inclusion (GILTI). The practice unit provides a detailed explanation of section 250 and how to calculate deductions under that section.

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