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Small Business Employee Benefits and HR Blog

FAQ - Which Fringe Benefits are Tax-Free?

As small and growing businesses evaluate employees’ compensation packages, fringe benefits are inevitably part of the discussion. Fringe benefits are a way to supplement employees’ salary and can often be offered tax-free. Tax-free fringe benefits help small businesses offer a richer compensation package and employees appreciate the workplace perks such as health benefits, on-site meals, and tuition reimbursement.

Wondering which fringe benefits can be offered tax-free? Here is quick guide.

Fringe Benefits Definition

Which Fringe Benefits are Tax-Free? According to Investopedia, the definition of a fringe benefit is “a collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are met.”

Common fringe benefits include health insurance, life insurance, tuition reimbursement, childcare reimbursement, cafeteria plans, employee discounts, personal use of a company owned vehicle, cell phones, and meals provided at the workplace.

Which Fringe Benefits are Tax-Free?

In Publication 15-B, the IRS lists types of employee benefits that may be offered tax-free. Here is a summary of fringe benefits and their tax treatment.

Type of Fringe Benefit Income Tax Withholding Social Security and Medicare Federal Unemployment (FUTA)
Accident and health benefits Exempt, except for long-term care benefits provided through a flexible spending or similar arrangement. Exempt, except for certain payments to S corporation employees who are 2% shareholders. Exempt
Achievement awards Exempt up to $1,600 for qualified plan awards ($400 for nonqualified awards).
Adoption assistance Exempt Taxable Taxable
Athletic facilities Exempt if substantially all use during the calendar year is by employees, their spouses, and their dependent children and the facility is operated by the employer on premises owned or leased by the employer.
De minimis (minimal) benefits Exempt
Dependent care assistance Exempt up to certain limits, $5,000 ($2,500 for married employee filing separate return).
Educational assistance Exempt up to $5,250 of benefits each year.
Employee discounts Exempt up to certain limits.
Employee stock options Varies. Refer to IRS Publication 15-B for a discussion on stock options. 
Employer-provided cell phones Exempt if provided primarily for noncompensatory business purposes.
Group-term life insurance coverage Exempt Exempt up to cost of $50,000 of coverage. (Special rules apply to former employees.) Exempt
Health savings accounts (HSAs) Exempt for qualified individuals up to the HSA contribution limits.
Lodging on your business premises Exempt if furnished for your convenience as a condition of employment.
Meals Exempt if furnished on your business premises for your convenience.
Moving expense reimbursements Exempt if expenses would be deductible if the employee had paid them.
No-additional-cost services Exempt
Retirement planning services Exempt
Transportation (commuting) benefits Exempt up to certain limits if for rides in a commuter highway vehicle and/or transit passes ($130), qualified parking ($250), or qualified bicycle commuting reimbursement ($20).
Tuition reduction Exempt if for undergraduate education (or graduate education if the employee performs teaching or research activities).
Working condition benefits Exempt

Chart Source - IRS Publication 15-B

Conclusion

Small and growing businesses can use fringe benefits such as health insurance, workplace perks, achievement awards, and retirement benefits to offer tax-free compensation and create a benefits package to recruit and retain the best employees.

What questions do you have about tax-free fringe benefits or how to use them?

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