Fringe benefits are a type of compensation a company may offer to an employee or person performing services for the company and are often used to recruit top job candidates and motivate employees.
What is a fringe benefit?
Fringe benefits are a type of compensation a company may offer to an employee or person performing services for the company. Fringe benefits are often an excellent resource for recruiting top job candidates and motivating employees when the labor market has many job openings and few candidates. When fringe benefits apply to someone that is not an employee but performed services for your company, this can include independent contractors, partners, and others performing services for the company.
Taxable fringe benefits
Fringe benefits are taxable for the intent of federal income tax and FICA tax (both the employee’s and the employer’s portion) unless a provision of the tax law specifically excludes them. The amount included in gross income is the amount by which the benefit’s fair market value is more than the sum of what the employee pays for the benefit plus any amount the law excluded.
These benefits are generally subject to employment taxes and must be reported on Form W-2.
If an employer awards cash or non-cash prizes or merchandise to its employees for meritorious performance, productivity improvements, or similar reasons, such awards and prizes are generally considered taxable wages, with two specific exceptions.
For length-of-service and safety-recognition purposes only, non-cash awards of a tangible nature, such as merchandise (ex: watch, silver platter, crystal vase), may be eligible for tax-preferential treatment, up to specified dollar-value limits. Achievement awards for length-of-service or safety accomplishments may be excluded from an employee’s income up to a limit of $1,600 a year (value of a tangible nature) if made under the terms of a qualified plan. Similarly, even if made under a nonqualified plan, awards may be provided on a tax-free basis up to a limit of $400 a year (value of a tangible nature). Cash or awards that can convert into cash may not be excluded from income (including awards made via check, money order, shares of stock, all-expense-paid vacation, or a gift certificate for a restaurant).
Payments in the form of awards, prizes, and gifts are typically not excludable from federal income tax withholding, FICA, and FUTA. This type of payment includes any award or payment made in cash. For a tangible gift or prize that is not excludable, the employer must determine the value of the gift in determining how much federal income tax to withhold. Employers can treat such payments as supplemental wages.
The de minimis rule
Prizes, awards, and gifts from an employer to employees usually constitute taxable income to the employees, subject to federal income tax withholding, FICA, and FUTA. However, there are exceptions with special tax treatment provided in certain circumstances.
A non-cash prize, gift, or award may be excludable as a de minimis fringe benefit. The IRS defines a de minimis fringe as "any property or service for which the value is (after taking into account the frequency with which the employer provides similar fringes to their employees) so small as to make accounting for it unreasonable or administratively impracticable." In other words, if it is trackable, it is taxable.
The frequency with which such grants are made is key in determining whether the de minimis rule applies. For example, a gold watch given by an employer to each employee who completes 25 years of service could be excludable as a de minimis fringe benefit. However, if the employer provided the same watch to an employee without requiring a long service period, the de minimis exclusion would not apply.
Cash awards and gift certificates can be claimed for cash are never excludable as a de minimis fringe benefit.
