- PERSONAL DAYS, HOLIDAYS AND RELIGIOUS LEAVE
- VACATION PAY
- FLEXIBLE HOURS
- TAXATION OF NON-STATUTORY FRINGE BENEFITS
- NO-ADDITIONAL COST SERVICES
- WORKING CONDITION FRINGES
- QUALIFIED EMPLOYEE DISCOUNTS
- DE MINIMIS FRINGES
- CLUB DUES
- BELOW-MARKET LOANS
- COMPANY CARS
- QUALIFIED TRANSPORTATION FRINGE BENEFITS
- EXECUTIVE PERKS
- FRINGE BENEFITS AT-A-GLANCE
- FORMS AND CHECKLISTS
- What are some common voluntary benefits?
- Are fringe benefits tax-free to the employee?
- May an employer pay for the membership of a key employee in a private eating or country club?
- Is an employee’s personal use of a company car taxable income to the employee?
- Are commuting expenses taxable?
Businesses have traditionally offered employees an array of benefits that fall beyond pensions and deferred compensation arrangements. This section will discusses a number of these non-statutory (voluntary) fringe benefits.
Non-statutory fringe benefits (also referred to as perquisites or “perks”) are often restricted in general use to executives. These benefits offer no particular tax advantage to either the company or the executive. As with any other form of compensation, perks are generally taxable to the employee, and are deductible as a compensation expense to the company.
However, some fringe benefits may be tax-free to the employee, such as business expense accounts, no-additional-cost services, qualified employee discounts, working condition fringes, de minimis fringes, qualified transportation fringes, or qualified moving expense reimbursements.
Businesses offer employees paid time off for a number of holidays during the year. Few states regulate this time-off benefit. It has become a commonly expected norm. The actual number of holidays and days allowed away from work vary, often depending on specific industry practices and the size of the workforce.
In addition, employers allow workers days off to take care of non-company business that they cannot take care of outside of regular working hours. These are normally referred to as “personal days.”
Employers also grant employees time-off to attend religious obligations. Some members of the work force follow religious practices that require them to be absent from work on particular days. Employers are obligated by federal law to provide reasonable accommodation for these religious needs.
Salary and wages paid for vacations, holidays or special days off, such as birthdays, are taxed to the employee as though they were working on those days. And, the costs of these payments remain deductible to the employer.
NOTE: The IRS has ruled that amounts paid to an employee under a plan that allows employees who suffer medical emergencies to receive additional leave—surrendered to the employer by other employees or deposited by its employees in an employer-sponsored leave bank—are gross income to the employee who receives the leave.
Similarly, if an employer provides or pays the expenses for an employee’s vacation, the employee will recognize compensation regardless of whether it is provided as a reward for extraordinary performance or for other motivational reasons.
The demands of the current work environment and shifting demographics have required companies to actively consider alternative work schedules. Severe competition has also made the recruitment and retention of qualified employees important.
Many service industries such as food, banking and the accounting profession, have offered flexible work schedules. With the influx of women into the workforce over the past two decades and the subsequent need for “family friendly” policies, more firms are turning to flexible hours as an option.
While not appropriate for every type of business, flextime and other alternative work schedules have helped employees balance their work and family responsibilities and maintain productivity standards.
In general, a fringe benefit is taxable to the employee unless there is a specific provision in the Internal Revenue Code that allows for nontaxable treatment. Fringe benefits without their own statutory exclusion may be nontaxable, if they fit into one of six categories:
- No-additional-cost services;
- Qualified employee discounts;
- Working condition fringes;
- De minimis fringes;
- Qualified transportation benefits; and
- Qualified moving expense reimbursements.
A no-additional-cost service fringe benefit is a service provided by an employer to an employee, the employee’s spouse or dependent at no charge, at a reduced price or a with a total or partial rebate of the amount charged. This preferential tax treatment generally applies only to services, not goods.
The receipt of these services is excludable from an employee’s income if the service is provided without discrimination with regard to availability as to officers, owners and highly compensated employees. In addition, the following two requirements must be met:
- The fringe benefit must be a service that is offered for sale to customers in the ordinary course of business of the employer; and
- Providing such service must not cause the employer to incur a substantial extra cost.
A typical example of a no-additional-cost service would be an airline allowing its employee to fly for free (in an otherwise empty seat). In that case, an additional benefit (such as an in-flight meal) that is incidental to the benefit actually provided (the airfare), is also allowed.
A working condition fringe benefit is any service or property that an employee would be entitled to take a deduction for as a business expense or as depreciation had he paid for the item.
Examples of working condition fringe benefits are:
- A company car provided for an employee who must travel from customer to customer on business;
- Expenses associated with an employee’s office decor;
- Home computers; and
- Services, such as properly structured outplacement services offered to laid off employees.
Unlike other non-statutory fringe benefits, the anti-discrimination rules do not apply to working condition fringe benefits.
A qualified employee discount is a discount offered by the employer to his employees with respect to property or services for the personal use of the employee and his dependents. For a qualified employee discount to be excludable from an employee’s income, the discount must be a discount on services or property offered to customers in the ordinary course of the business in which the employee is engaged. The discount may not exceed 20% of the price at which the services are being offered to customers.
If the discount is on property, it may not exceed the employer’s gross profit percentage of the price at which the property is being offered to customers. In addition, qualified employee discounts may not be provided on real estate or investment property. Finally, as in the case of most benefits, the discount may not discriminate in favor of highly compensated employees.
A de minimis fringe benefit is a benefit that has a value so small that accounting for it is impractical. For example, a common de minimis fringe benefit is a company cafeteria located on or near the employer’s business premises, where the cost of the meals paid by employees covers the direct cost of running the cafeteria. Executive dining rooms do not qualify, since the de minimis fringe benefit of employer-provided eating facilities may not be provided on a discriminatory basis to highly compensated employees.
NOTE: The anti-discrimination provisions do not apply to the provision of de minimis fringe benefits, other than eating facilities.
A de minimis benefit may only be provided on an infrequent basis. Frequency is determined by an employer perspective, if it is administratively difficult for the employer to determine the frequency of a particular employee usage. Thus, even if an employee frequently uses the company cafeteria, he generally is considered in receipt of a nontaxable de minimis fringe benefit. However, an individual membership in a private country club or athletic facility, regardless of the frequency with which the employee uses the facility, is not a de minimis fringe benefit.
A de minimis fringe benefit can include employee prizes and service awards. However, cash and cash equivalent fringe benefits can never qualify as a de minimis fringe benefit.
A company may pay for the membership of a key employee in a private eating or country club. This perk is also more common in closely held companies because of the common practice of having the company cover the owner-employee’s living expenses.
NOTE: Club dues paid or incurred after 1993 are no longer deductible. Under prior law, club dues were deductible under certain conditions. But, specific business expenses, such as for meals, that are incurred at a club eatery—as anywhere else—are still deductible, to the extent (50%) any business meals and entertainment are currently deductible.
The forgiven interest on low-interest or interest-free loans will be considered taxable income to an employee/borrower for loans from employers over $10,000.
Company cars are those owned by the employer but used by the employee. An employee’s personal use of the car is taxable income to the employee, unless the employee reimburses the company for that expense. Reimbursement for private use is more common in public companies than in closely-held companies.
Qualified transportation fringe benefits include:
- Transportation to and from work in a “commuter highway vehicle” (basically a bus or van);
- A transit pass; or
- Qualified parking.
Qualified parking includes parking at or near the employer’s business location, or at or near a location where the employee can commute to work by a commuter highway vehicle provided by the employer. The allowable benefit level for qualified parking is $175 per month.
- Mass transit subsidies.
- Mass transit subsidies (transportation by commuter highway vehicle or transit passes) are permitted up to $65 per month.
- Commuting expenses.
- Commuting expenses are generally taxable. Thus, the value of a car and driver usually will be imputed to an executive as income.
Some examples of taxable fringe benefit perks:
- Executive Dining Rooms
- These are provided as a method of increasing the executive’s productivity by decreasing the time needed to eat. The value of the meal is taxable to the executive.
- Expense Accounts
- An expense account is usually provided for an executive as a means of paying for business expenses. Use of such an account for personal expenses will result in taxable income to the extent of the personal use.
- Financial Counseling
- Many corporations provide assistance to executives in structuring their financial affairs in order to free the executives from concerns that might distract them from doing their job.
- Lodging on Company Premises
- Unless required for the convenience of the employer, the provision of lodging on company premises is considered a personal expense of the employee.
- Free or Reduced Cost Parking
- Free or reduced cost parking generally is considered a qualified transportation fringe benefit and, thus, is not includable in an employee’s gross income except to the extent that the value of such parking exceeds $175.
- Home Security Services
- Because of the threat of kidnappings and other crimes, some corporations are providing home security services for high-level executives. The value of such services generally is considered a taxable personal expense.
- Athletic Facilities
- The value of the use or availability of an on-site athletic facilities may be excluded from an employee’s compensation. Athletic facilities are somewhat peculiar in the eyes of the tax law, in that the anti-discrimination provisions which otherwise apply to fringe benefits under the tax code do not apply to employer provided athletic facilities.
- Non-statutory fringe benefits (also referred to as perquisites or “perks”) are often restricted in general use to executives.
- Some fringe benefits may be tax-free to the employee, such as business expense accounts, no-additional-cost services, qualified employee discounts, working condition fringes, de minimis fringes, qualified transportation fringes, or qualified moving expense reimbursements.
- Unlike other non-statutory fringe benefits, the anti-discrimination rules do not apply to working condition fringe benefits.
- A de minimis fringe benefit is a benefit that has a value so small that accounting for it is impractical.
- The anti-discrimination provisions do not apply to the provision of de minimis fringe benefits other than eating facilities.
- A company may pay for the membership of a key employee in a private eating or country club.
- Company cars are those owned by the employer but used by the employee. An employee’s personal use of the car is taxable income to the employee,unless the employee reimburses the company for that expense.
- Commuting expenses are generally taxable.