A fringe benefit is a form of pay for the performance of services given by the provider of the benefit to the recipient of the benefit. For example, you provide an employee a fringe benefit when you allow the employee to use a business vehicle to commute to and from work.
Elements of a Fringe Benefit
- Performance of services. A person who performs services for you does not have to be your employee. A person may perform services for you as an independent contractor, partner, or director. Also, for fringe benefit purposes, treat a person who agrees not to perform services (such as under a covenant not to compete) as performing services
- Provider of benefit. You are the provider of a fringe benefit if it is provided for services performed for you. You may be the provider of the benefit even if it was provided by another person. For example, you are the provider of a fringe benefit your client or customer provides to your employee for services the employee performs for you
- Recipient of benefit. The person who performs services for you is the recipient of a fringe benefit provided for those services. That person may be the recipient even if the benefit is provided to someone who did not perform services for you. For example, your employee may be the recipient of a fringe benefit you provide to a member of the employee's family
Are Fringe Benefits Taxable?
Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it.
Including Taxable Benefits in Pay
You must include in a recipient's pay the amount by which the value of a fringe benefit is more than the sum of the following amounts:
- Any amount the law excludes from pay
- Any amount the recipient paid for the benefit
Fringe Benefits Valuation Rules
You must use the general valuation rule to determine the value of most fringe benefits. Under this rule, the value of a fringe benefit is its fair market value.
Fair Market Value
The fair market value of a fringe benefit is the amount an employee would have to pay a third party in an arm's-length transaction to buy or lease the benefit. Determine this amount on the basis of all the facts and circumstances. Neither the amount the employee considers to be the value of the fringe benefit nor the cost you incur to provide the benefit determines its fair market value.
Fringe Benefit Exclusion Rules
There are certain fringe benefits that are not subject to federal income tax withholding. Also in some cases they are not subject to social security, Medicare or federal unemployment tax and are not reported on Form W-2. Exclusion Rules apply to the following fringe benefits:
- Accident and health benefits
- Achievement awards
- Adoption assistance
- Athletic facilities
- De minimis (minimal) benefits
- Dependent care assistance
- Educational assistance
- Employee discounts
- Employee stock options
- Group-term life insurance coverage
- Lodging on your business premises
- Moving expense reimbursements
- No-additional-cost services
- Transportation (commuting) benefits
- Tuition reduction
- Working condition benefits
*Please refer to Fringe Benefit Exclusion Rules in Publication 15-B for further clarification.