Fringe Benefits: A Refresher for 2020
One area of tax law that remains a point of confusion for taxpayers—and has been further complicated by legislation passed in recent years—is the topic of fringe benefits. The word “fringe” implies a level of uncertainty. In golf, fringe refers to the area between the putting green and the rough. While the fringe may look like the surface of the putting green, the rules for play aren’t the same as when the ball is located on the putting surface. Like with golf, in tax, the fringe indicates an area of ambiguity. In this case, it’s the line between a taxable and nontaxable benefit. A fringe benefit is a form of payment for the performance of services. Any fringe benefit an employer provides is taxable and must be included in the recipient’s pay unless the law specifically excludes it. If the recipient receives the taxable benefit in 2020, it should be reported on the following information returns:
- Employee: Form W-2 (subject to employment taxes)
- Independent Contractor: Form 1099-NEC (new in 2020)
- Pass-Through Owner: Schedule K-1
In this article, we’ll cover some of the more common fringe benefits employers may provide to their employees. While the rules for several of these benefits are clear and understandable, others can be a bit trickier to get right.
Let’s start with one of the more straightforward types of fringe benefits: moving expenses. Except for employees who are members of the U.S. Armed Forces on active duty moving due to a military order, any moving expense reimbursement should be included in the employees’ wages. An employer can still provide this benefit to an employee, but the employee must treat the benefit as compensation and pay tax on the amount received.
De Minimis Fringe Benefits
A de minimis fringe benefit is any property or service the employer provides to its employees that’s so small, accounting for it would be unreasonable or administratively impractical. For example, it would be unreasonable for an employer to track the coffee and snack consumption of each employee and allocate that benefit as taxable wages on each employee’s Form W-2.
Another example of a de minimis benefit is sporting event tickets. If a ticket to a single game is provided to an employee, it’s considered de minimis. If an employer provides the employee with season tickets, then the de minimis exception doesn’t apply.
The personal use value of an employer-provided cellphone, provided for noncompensatory business reasons, is excludable from an employee’s income. Conversely, a compensatory reason, such as providing cellphones to boost morale, promote goodwill, or attract prospective employees, would result in a taxable event for the employee.
Employee Gifts & Awards
Employee gifts and achievement awards fall outside the de minimis fringe category. While an exclusion does apply to the value of any tangible personal property given to an employee, the exclusion doesn’t apply to cash, gift cards, or gift certificates. A $100 Visa gift card to the employee of the month will come with a small tax burden to your star employee. A better option may be tickets to a sporting event or some other tangible perk to show appreciation for an employee achievement.
The final area to cover is transportation benefits and the use of a company vehicle. For qualified transportation benefits provided during 2020, such as transit passes and qualified parking, employees can exclude up to $270 per month from their wages ($265 for 2019), resulting in a corresponding disallowance for that expense for the employer. Use of a company vehicle, however, doesn’t follow the same $270 exclusion. Rather, personal use of a company-owned vehicle is generally a taxable noncash fringe benefit. It’s important to understand that personal use of a company vehicle includes commuting to and from work. There may be an exclusion from gross wages if the employee’s personal use is de minimis, meaning the personal use is infrequent and unreasonable to track.
Another exclusion is for vehicles considered to be a qualified nonpersonal use vehicle. These are vehicles that have a special design that make personal use unlikely, e.g., clearly marked public safety vehicles, hearses, moving vans, delivery trucks, and school buses. Also included in this list are certain pickup trucks and vans that have been specially modified so they’re not likely to be used more than minimally for personal purposes. If the vehicle use is determined to be a taxable noncash fringe benefit, additional analysis will be needed to determine the method of valuation. Check out this BKD Thoughtware® article for more information about these rules and the analysis required.