Fringe benefits are generally included in an employee’s gross income (there are some exceptions). The benefits are subject to income tax withholding and employment taxes. Fringe benefits include cars and flights on aircraft that the employer provides, free or discounted commercial flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events.
In general, the amount the employer must include is the amount by which the fair market value of the benefits is more than the sum of what the employee paid for it plus any amount that the law excludes. There are other special rules that employers and employees may use to value certain fringe benefits. See Publication 15-B, Employers' Tax Guide to Fringe Benefits, for more information.
The Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of the unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. Only the employer pays FUTA tax; it is not withheld from the employee’s wages.
The Department of Labor provides information and links on what unemployment insurance is, how it is funded, and how employees are eligible for it.
In general, the Federal-State Unemployment Insurance Program provides unemployment benefits to eligible workers who are unemployed through no fault of their own (as determined under state law), and meet other eligibility requirements of state law.
- Unemployment insurance payments (benefits) are intended to provide temporary financial assistance to unemployed workers who meet the requirements of state law.
- Each state administers a separate unemployment insurance program within guidelines established by federal law.
- Eligibility for unemployment insurance, benefit amounts and the length of time benefits are available are determined by the state law under which unemployment insurance claims are established.
- In the majority of states, benefit funding is based solely on a tax imposed on employers. (Three states require minimal employee contributions.)
- For additional information, visit the Department of Labor’s website under the listing of Unemployment Insurance Tax Topics.
The Department of Labor's Office of Workers' Compensation Programs (OWCP) administers four major disability compensation programs that provide wage replacement benefits, medical treatment, vocational rehabilitation and other benefits to federal workers or their dependents who are injured at work or who acquire an occupational disease.
Individuals injured on the job while employed by private companies or state and local government agencies should contact their state workers' compensation board. The Department of Labor has several programs designed to prevent work-related injuries and illnesses. You may obtain information about these programs by visiting the Find It! By Topic Workplace Safety & Health page.
Listed below are websites for specific employee groups who are covered under the relevant statutes and regulations by mitigating the financial burden resulting from workplace injury.
- Energy Employees Occupational Illness Compensation Program
- Federal Employees' Compensation Program
- Longshore and Harbor Workers' Compensation Program
- Black Lung Benefits Program
If an employer pays the cost of an accident or health insurance plan for his/her employees, including an employee’s spouse and dependents, the employer’s payments are not wages and are not subject to Social Security, Medicare, and FUTA taxes, or federal income tax withholding. Generally, this exclusion also applies to qualified long-term care insurance contracts. However, the cost of health insurance benefits must be included in the wages of S corporation employees who own more than two percent of the S corporation (two percent shareholders).
Health insurance programs allow workers and their families to take care of essential medical needs. A health plan can be one of the most important benefits provided by an employer. The Department of Labor's Health Benefits Under the Consolidated Omnibus Budget Reconciliation ACT (COBRA) provides information on the rights and protections that are afforded to workers under COBRA.
Certain individuals who are eligible for COBRA continuation health coverage, or similar coverage under state law, may receive a subsidy for 65 percent of the premium. Employers may recover the subsidy provided to assistance-eligible individuals by taking the subsidy amount as a credit on its quarterly employment tax return. For more information see:
- Help Employers Claim COBRA Medical Coverage Credit on Payroll Tax Form
- COBRA Health Insurance Continuation Premium Subsidy
- COBRA: Answers for Employers
Retroactive Increase in Excludible Transit Benefits for 2012
Employees may exclude the value of some transit benefits their employer provided to them. Prior to the enactment of the American Taxpayer Relief Act, the maximum amount excludible for the aggregate of transportation in a commuter highway vehicle and any transit pass (referred to as “transit benefits”) for 2012 was $125 per month. In January 2013, the limit for 2012 increased, retroactively, to $240 per month.
The IRS issued Notice 2013-08 (PDF) to provide guidance to employers on how to account for the retroactive change when filing Forms 941 and W-2. Employees who received transit benefits in excess of $125 per month in 2012 that were treated as taxable solely because of the $125 limit in effect during the year may be entitled to a refund.