Fringe Benefits - FAQs

Yes. The employee must provide substantiation “within a reasonable period,” which will depend on the facts and circumstances or by using one of two safe harbor methods. One safe harbor method is the “fixed date method,” in which substantiation for an advance is made within 30 days, expense within 60 days or an amount returned to a payer within 120 days. The “periodic statement method” is used when a payer provides employees with periodic statements and requests substantiation for any expenses that have not yet been substantiated; a reasonable time for the employee to substantiate or return the reimbursement is 120 days.

As long as the pastor can substantiate the business purpose of the lunch (the primary purpose is not social) and the expense is paid under an accountable plan, the reimbursement should not be taxable.

Yes, as long as the criteria are met for an accountable plan: a business connection is required; adequate substantiation is required; and employees are required to refund any advance exceeding substantiated expenses.

Accountable plans should be written (as a best practice) and must contain: (1) a business connection, (2) substantiation and (3) a requirement that amounts in excess of expenses are returned to the employer. You may utilitze different plans for different types of policies. For example, you might maintain an accountable plan for travel and entertainment expenses and a separate accountable plan for moving reimbursements. You may utilize an accountable plan for reimbursements to one employee and a non-accountable plan for reimbursements to another employee.

Bottom line:  If you execute a written policy for expense reimbursements that meet the requirements, you should be in compliance.

Employers may provide benefits to nondiscriminatory (not in favor of highly compensated individuals) categories of employees. For example, it is acceptable for employee discounts to be given to a store’s sales personnel and executives, but not to office or other non-sales categories if otherwise nondiscriminatory. Keep in mind, discounts given to hospital employees may not exceed 20 percent of the price the public would pay without triggering taxable compensation.

As long as the benefit is offered to all employees of XYZ without discrimination in favor of highly compensated individuals and the use of the facility by the employees of XYZ does not incur any significant additional cost to operate ABC, the benefit should be excluded from taxable income.

Newly released Notice 2011-72 announced cell phones required for noncompensatory business purposes are excluded from employee income. The business portion is excluded as a working condition fringe benefit, and the personal portion is excluded as a de minimis fringe benefit.

The IRS also released a memorandum providing guidance to IRS examiners with regards to personal cell phone reimbursements. The memorandum treats reimbursements the same as employer-provided cell phones; personal use is excluded as a de minimis fringe benefit if the phone is required for noncompensatory business purposes as long as the reimbursement amount does not exceed the cost incurred. Care should be taken to ensure the employee's cell phone cost does not include charges not required to perform the employee's duties.

A cell phone is provided or reimbursed for compensatory purposes (and therefore taxable to the employee) when provided to promote morale or goodwill of the employee, attract a prospective employee or as a means of furnishing additional compensation.

Daily amount reimbursements might be considered an allowance (no substantiation by the employee), which are generally taxable. Consider structuring the daily amount as a reimbursement. Have the employee submit information regarding actual cell phone costs incurred to establish that the reimbursement does not exceed the employee's cost.

Newly released Notice 2011-72 announced cell phones required for noncompensatory business purposes are excluded from employee income. The business portion is excluded as a working condition fringe benefit, and the personal portion is excluded as a de minimis fringe benefit.

The IRS also released a memorandum providing guidance to IRS examiners with regards to personal cell phone reimbursements. The memorandum treats reimbursements the same as employer-provided cell phones; personal use is excluded as a de minimis fringe benefit if the phone is required for noncompensatory business purposes as long as the reimbursement amount does not exceed the cost incurred. Care should be taken to ensure the employee's cell phone cost does not include charges not required to perform the employee's duties.

A cell phone is provided or reimbursed for compensatory purposes (and therefore taxable to the employee) when provided to promote morale or goodwill of the employee, attract a prospective employee or as a means of furnishing additional compensation.

Flat-rate reimbursements might be considered an allowance (no substantiation by the employee), which are generally taxable. Consider structuring the flat rate amount as a reimbursement. Have the employee submit information regarding actual cell phone costs incurred to establish that the reimbursement does not exceed the employee's cost.

Newly released Notice 2011-72 announced cell phones required for noncompensatory business purposes are excluded from employee income. The business portion is excluded as a working condition fringe benefit, and the personal portion is excluded as a de minimis fringe benefit.

The IRS also released a memorandum providing guidance to IRS examiners with regards to personal cell phone reimbursements. The memorandum treats reimbursements the same as employer-provided cell phones; personal use is excluded as a de minimis fringe benefit if the phone is required for noncompensatory business purposes as long as the reimbursement amount does not exceed the cost incurred. Care should be taken to ensure the employee's cell phone cost does not include charges not required to perform the employee's duties.

A cell phone is provided or reimbursed for compensatory purposes (and therefore taxable to the employee) when provided to promote morale or goodwill of the employee, attract a prospective employee or as a means of furnishing additional compensation.

Monthly reimbursements might be considered an allowance (no substantiation by the employee), which are generally taxable. Consider structuring the monthly amount as a reimbursement. Have the employee submit information regarding actual cell phone costs incurred to establish that the reimbursement does not exceed the employee's cost.

Newly released Notice 2011-72 announced cell phones required for noncompensatory business purposes are excluded from employee income. The business portion is excluded as a working condition fringe benefit, and the personal portion is excluded as a de minimis fringe benefit. It would not be necessary to determine the personal use of a cell phone regardless of whether it is an employer-provided cell phone or reimbursement for business use of a personal cell phone.

If, however, the phone is not provided or required for noncompensatory business purposes, you should follow guidance prior to release of this notice. While the detailed reporting and documentation is no longer needed for depreciation purposes, it is needed to determine personal versus business use. Maintaining a detailed call log is the most conservative way to document which calls are personal and which are business-related. You also may have the employee provide a written statement as to the percentage personal and percentage business each year.

A cell phone is provided or reimbursed for compensatory purposes (and therefore taxable to the employee) when provided to promote morale or good will of the employee, attract a prospective employee or as a means of furnishing additional compensation.

Newly released Notice 2011-72 announced cell phones required for noncompensatory business purposes (on call 24/7 is an example of a noncompensatory business purpose) are excluded from employee income. The business portion is excluded as a working condition fringe benefit, and the personal portion is excluded as a de minimis fringe benefit. It would not be necessary to distinguish between the business and personal portions for physicians who are "on call" and thus required to maintain a cell phone regardless of whether it is an employer-provided cell phone or reimbursement for business use of a personal cell phone.

Newly released Notice 2011-72 announced cell phones required for noncompensatory business purposes are excluded from employee income. The business portion is excluded as a working condition fringe benefit, and the personal portion is excluded as a de minimis fringe benefit. It would not be necessary to determine the personal use of a cell phone regardless of whether it is an employer-provided cell phone or reimbursement for business use of a personal cell phone.

If, however, the phone is not provided or required for noncompensatory business purposes, you should follow guidance prior to release of this notice. While the detailed reporting and documentation is no longer needed for depreciation purposes, it is needed to determine personal versus business use. Maintaining a detailed call log is the most conservative way to document which calls are personal and which are business-related. You also may have the employee provide a written statement as to the percentage personal and percentage business each year.

A cell phone is provided or reimbursed for compensatory purposes (and therefore taxable to the employee) when provided to promote morale or good will of the employee, attract a prospective employee or as a means of furnishing additional compensation.

Newly released Notice 2011-72 announced cell phones required for noncompensatory business purposes are excluded from employee income. The business portion is excluded as a working condition fringe benefit, and the personal portion is excluded as a de minimis fringe benefit. It is no longer necessary to determine the personal use of a cell phone regardless of whether it is an employer-provided cell phone or reimbursement for business use of a personal cell phone.

Newly released Notice 2011-72 announced cell phones required for noncompensatory business purposes are excluded from employee income. The business portion is excluded as a working condition fringe benefit, and the personal portion is excluded as a de minimis fringe benefit. It would not be necessary to determine the personal use of a cell phone regardless of whether it is an employer-provided cell phone or reimbursement for business use of a personal cell phone.

Newly released Notice 2011-72 announced cell phones required for noncompensatory business purposes are excluded from employee income. The business portion is excluded as a working condition fringe benefit, and the personal portion is excluded as a de minimis fringe benefit. It would not be necessary to determine the personal use of a cell phone regardless of whether it is an employer-provided cell phone or reimbursement for business use of a personal cell phone.

The IRS released Notice 2011-72 on September 14, 2011, with this "additional guidance."

Notice 2011-72 announced cell phones for required noncompensatory business purposes are excluded from employee income. The business portion is excluded as a working condition fringe benefit, and the personal portion is excluded as a de minimis fringe benefit. It would not be necessary to determine the personal use of a cell phone regardless of whether it is an employer-provided cell phone or reimbursement for business use of a personal cell phone.

Personal use of employer-provided cell phones is now excluded as a de minimis fringe benefit if the cell phone is provided for noncompensatory business purposes.

For tax years beginning after December 31, 2009, the Small Business Jobs Act of 2010 (the Act) P.L. 111-400 removes cellular telephones (cell phones) and other similar telecommunications equipment from the categories of “listed property” under [IRC §280F]. Thus, the heightened substantiation requirements that apply to listed property don’t apply to cell phones.

However, recently released Notice 2011-72 announced cell phones required for noncompensatory business purposes are excluded from employee income. The business portion is excluded as a working condition fringe benefit, and the personal portion is excluded as a de minimis fringe benefit.

Newly released Notice 2011-72 announced cell phones required for noncompensatory business purposes are excluded from employee income. The business portion is excluded as a working condition fringe benefit, and the personal portion is excluded as a de minimis fringe benefit.

The IRS also released a memorandum providing guidance to IRS examiners with regards to personal cell phone reimbursements. The memorandum treats reimbursements the same as employer-provided cell phones; personal use is excluded as a de minimis fringe benefit if the phone is required for noncompensatory business purposes.

A cell phone is provided or reimbursed for compensatory purposes (and therefore taxable to the employee) when provided to promote morale or good will of the employee, attract a prospective employee or as a means of furnishing additional compensation.

Yes. The portion of the monthly membership fee representing the meal charge, if used for non-business purposes, should be taxed to the employee using the club.

Yes, these membership fees are generally taxable to the employees and should be included in their gross income.

As long as there is no substantial additional cost in providing access to employees, the FMV of the membership is excluded from the employee's income.

Generally, the dues disallowance rule does not apply to civic or personal service organizations, such as Kiwanis, Lions, Rotary, Civitan and other similar organizations, if you are able to demonstrate a relationship between the dues paid and the business interest of your organization and the membership helps the employee carry out his or her job with your organization.

You do not need to report any compensation to the employee if he or she reimburses the organization (or pay directly to the club) the personal portion of the dues. The payment of club dues and a paragraph description regarding reimbursement by the president should be reported in Schedule J of Form 990.

While membership is expected of YMCA board members, the organization would need to establish a business connection/purpose for the board member to sit on the YMCA board. Any personal expenses incurred relative to the YMCA membership by the board member is taxable to the VP unless a business connection/purpose for the charge can be substantiated. Membership dues should be prorated between taxable and nontaxable based on the personal use of the membership by the employee.

Yes, the reimbursement is taxable compensation to the employee. The companion must be an employee to qualify for nontaxable reimbursement.

Yes, the companion must be an employee to qualify for nontaxable reimbursement. See IRC Sec. 274(m)(3).

An annual mileage log is the best method to document personal versus business use of an automobile.

Unfortunately, our slide has a typo in it. Employees under age 21 who have not completed one year of service are excluded from the plan discrimination testing, and not from participating in the plan. We apologize for this error.

If the certification is a condition of the employee’s employment (it appears that it might be), then the reimbursement should qualify as a job-related educational expense and not taxable to the employee.

Yes. As long as you have a written plan in place that meets the requirements, any reimbursement over $5,250 would be taxable to the employee.

Yes. Since the payment was not paid under the educational assistance plan, the assistance would be taxable. Look to the nature of the reimbursement to see if the payment might qualify as a working condition fringe benefit (the cost of the education would be a deductible expense to the employee) or if the payment might qualify as a job-related expense (required by employee’s employment and a condition of employment).

IRC 127(b)(4). “A program must not provide eligible employees with a choice between educational assistance and other remuneration includible in gross income.” Accordingly, educational benefits must not be available under a cafeteria plan. Both the written plan and the business practices of the employer are taken into account in determining if taxable benefits are offered as an alternative.

Tuition assistance for graduate level courses is only excludable from income if it is for graduate students who also are teaching and/or research assistants. Tuition assistance that meets the criteria for being nontaxable as tuition reduction (see section below) is not limited in amount and may exclude the entire cost of the tuition.

The discount must meet the criteria for exclusion as employee discounts. Since this is services, the discount should not exceed 20 percent of the price offered to customers. The extra 30 percent discount you are giving should be taxable to the employee. However, if the center incurs no additional costs in providing the care, the benefit should be excluded as a no additional cost fringe benefit.

As long as the discount meets the criteria for exclusion as employee discounts, this would not be a problem. Since this is property, the discount should not exceed the employer’s gross profit percentage (employer’s cost for the item).

As long as the discount meets the criteria for exclusion as employee discounts, this would not be a problem. Since this is property, the discount should not exceed the employer’s gross profit percentage (the hospital’s cost).

No. The same rules must be followed, and the correct taxable fringe benefit amounts should be included in the employee’s taxable income when applicable.

As long as the employee can substantiate business use of the Internet while at home, the business use percentage of the payment would not be taxable.

Yes, the fair market value of the company laptop should be included as taxable wages to the CEO.

The employees must at least pay the cost of the merchandise to avoid taxable income.

Currently, the IRS does not require the personal use of in-kind promotional benefits to be included in the employee’s taxable income. However, any promotional benefits converted into cash are considered taxable wages.

Yes, gift cards are considered cash and are always taxable.

Yes. Gift cards are considered cash and are always taxable. This would be reported to the volunteer on Form 1099 if they receive enough taxable benefits to exceed the $600 Form 1099 reporting threshold.

Yes. Gift cards are considered cash and are always taxable to the recipient.

Yes. It does not matter how the organization came into possession of the property. Any gift cards provided are taxable income to the employee. Any items over the de minimis should be analyzed for any other exclusions for taxability.

This is still taxable, because the gift card operates in essentially the same way as a cash equivalent with a readily ascertainable value that can be easily accounted for and allows the employee to use for general merchandise.

As long as the certificate is redeemable ONLY for the turkey, then the provision of the certificate is not taxable to the employee.

Yes. Gift certificates are cash equivalents and are always taxable.

Yes, the prizes are taxable to the employee. It does not matter how or why the employee received the prize or how the organization came into possession of the prize. Remember to check withholding rules for prizes of substantial value.

Yes. All gift cards are taxable income to the employee. The value of the television should be added to the employee’s income regardless of the cost to the organization.

That is correct. The minister would still be subject to self-employment tax. The amount may be reported in Box 14 of Form W-2 so that the minister knows how much to pay self-employment tax on. However, allowances that exceed qualifying expenses are taxable to the minister.

Even if employees pay the full cost of group-term life insurance in excess of $50,000 with after-tax dollars, they face another potential tax trap under IRC Sec. 79. If the rates employees are paying with their own after-tax dollars for such excess coverage are below the Table I rates used to calculate the taxable portion for coverage over $50,000, those employees will still have imputed income under Table I for the difference between what they are paying and the Table I rates if the group-term policy is “carried directly or indirectly” by their employer. For example, if an employee’s actual annual after-tax costs are $800 and the Table I costs are $1,000, the employee will have $200 of annual imputed income measured under the Table I rates. This unfortunate result may be avoided, however, if the group-term life insurance policy providing the excess coverage is not “carried directly or indirectly by the employer.” A group-term life insurance policy will generally not be considered to be carried directly or indirectly by the employer if all the insurer’s actual rates are either above or below the Table I rates and the employer does not make any contributions, i.e., participating employees pay 100 percent of the cost of coverage with their own after-tax dollars.

Per diem payments are not taxable to the employee, as long as they are paid under an accountable plan for ordinary and necessary business expenses incurred or reasonably anticipated to be incurred. Payments must be reasonably calculated to not exceed the amount of the expenses or anticipated expenses, and the payment rate must be at or below the applicable federal per diem rate.

The employee’s meal would be excluded as a working condition fringe benefit since he or she is traveling away from home for business as long as the expense is reimbursed under an accountable plan. The cost of the meal for the friend, however, would be taxable to the employee since it is not a necessary business expense of the employer. It does not matter that the employee is saving the employer the cost of a hotel room.

Facts and circumstances will determine whether the meals are nontaxable fringe benefits. Travel meals would be excludable from income only when the employee is in “travel status.” An employee is considered to be in travel status on a business trip only if his or her duties require the employee to be away from his or her tax home substantially longer than an ordinary day’s work, and sleep or rest is required to meet the work demands. (This is known as the overnight rule or the sleep or rest rule.) This is not a literal test in the sense that the employee must be away from his or her tax home for the whole day or from dusk to dawn. However, it does require the trip to be of such a length as to require adequate sleep or rest to allow the employee to continue working. If the business locations, for example, are in the same city, meals would be taxable compensation to the employee.

The provision of a free lunch during the month of an employee’s birthday would be nontaxable as a de minimis fringe benefit.

The Defense of Marriage Act prohibits treating a same sex partner as a “spouse” for federal law, including federal tax laws relating to employee benefits. Though the plan may offer benefit coverage to same-sex partners, it is taxable to the employee.

Employer-paid premiums for health insurance coverage plans are not taxable to the employee (including family coverage plans). See IRC Sec. 106(a).

Sounds like this is a Health Reimbursement Arrangement (HRA), which if the requirements are met, would not be taxable to the employee. Review the rules for HRAs to help determine whether you are meeting the requirements.

Company-provided health benefits such as blood screening and flu shots provided to all employees on a nondiscriminatory basis should qualify as a de minimis fringe benefit excluded from compensation.

The cost of employer-provided health insurance reporting on Form W-2 is optional for 2011 reporting and is optional for “smaller employers” in 2012. Smaller employers are defined as employers that file fewer than 250 Forms W-2 for the 2011 reporting year.

The time is 78 weeks during the following 24-month period. The rules apply to all employees of an employer, regardless of whether they are new or current employees.

You would report any reimbursement the employee receives in Box 12 with code P. The employee is able to deduct any non-reimbursed qualified moving expenses as an employee business expense.

As the slide shows, reimbursements directly to the employee are reported on the employee's
Form W-2 in Box 12 using Code P. Payments directly to third parties or furnished in kind are not reported on Form W-2.

The “occasional” giving of tickets to athletic or entertainment events is considered a de minimis fringe benefit and not taxable to the employee. However, season tickets given to an employee would be considered taxable, and the FMV would be included in their taxable income.

The “occasional” giving of tickets to athletic or entertainment events is considered a de minimis fringe benefit and not taxable to the employee. However, season tickets given to an employee would be considered taxable, and the FMV would be included in their taxable income. It does not matter how the organization receives the tickets (whether purchased or donated).

The “occasional” giving of tickets to entertainment events is considered a de minimis fringe benefit and not taxable. However, season tickets given would be considered taxable, and the FMV would be included in their taxable income. The $600 threshold applies in determining whether a Form 1099 should be issued if the board member is not otherwise compensated as an employee. In addition, if attendance at the organization's event by board members has a bona fide business purpose for the organization, the organization may exclude the ticket value from the board member's income.

Since the directors do not receive compensation for their services, they are considered volunteers and must use the volunteer rate of $0.14/mile.

The tuition reduction exclusion applies to “an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on” IRC Sec. 170(b)(1)(A)(ii), IRC Sec. 117(d)(2). The reduction may be for any amount up to total cost of tuition. Therefore, in your case, if the other requirements are met (nondiscriminatory, etc.), this would be nontaxable.

In a typical higher education scenario, a GA is provided cash remuneration as well as free tuition. There should be a bifurcation of the value of the services performed by the GA (taxable compensation) from the scholarship (nonreportable and, in most cases, tax-free to the GA). Valuing the services can be problematic, as there are wide variances in the duties performed and when those services are provided. For example, a GA for a football team may travel with the team and may work more or less hours than another GA, yet receive the same package of GA benefits.

Some employers have attempted to value using minimum wage standards, and others have analyzed similar paid positions that did not utilize a GA. In some cases, after analyzing their typical GA arrangement, a 50-50 split was deemed reasonable. The guidelines provide for flexibility in making the determination.

A reasonable and consistent approach also is important. Documentation of your analysis is highly recommended to support your conclusion.