Fringe Benefit Tax

The fringe benefit tax rules decide which employee perks are tax-free and which must be added to wages. Getting this right protects employers from penalties and helps employees understand why certain benefits appear on their pay stub or W-2. This guide explains how fringe benefits are taxed in the United States, which benefits are excluded and how employers report them.

Are Fringe Benefits Taxable?

As a general rule, all fringe benefits are taxable unless the Internal Revenue Code specifically excludes them. A taxable fringe benefit is included in the recipient’s pay and is subject to federal income tax withholding, Social Security and Medicare taxes and federal unemployment tax. The main IRS reference is Publication 15-B, Employer’s Tax Guide to Fringe Benefits, which is updated every year.

How Fringe Benefits Are Taxed

Income Tax Withholding

Taxable non-cash fringe benefits may be treated as supplemental wages. Employers can either add the value to regular wages and withhold normally, or withhold federal income tax at the flat supplemental rate. Employers may also choose not to withhold income tax on the value of an employee’s personal use of a company vehicle, as long as the employee is notified and the value is still reported.

Social Security and Medicare (FICA)

The taxable value of most fringe benefits is subject to FICA. The employer pays its share and withholds the employee’s share, just as with cash wages.

Federal Unemployment Tax (FUTA)

Taxable fringe benefits generally count toward FUTA wages as well, up to the annual wage base.

Non-Taxable Fringe Benefits

The tax code excludes a range of benefits from income, either completely or up to a limit. The most common include:

Accident and health benefits: Employer-paid medical, dental and vision insurance premiums.
Group-term life insurance: Coverage up to $50,000. The cost of coverage above that amount is taxable.
Retirement contributions: Employer contributions to qualified plans such as a 401(k).
Dependent care assistance: Excluded up to the annual limit set by law.
Educational assistance: Up to $5,250 per year under a qualified written plan.
Working condition benefits: Items the employee could deduct as a business expense if they paid for them, such as a work phone or job-related training.
De minimis benefits: Small, occasional perks such as snacks, holiday gifts of low value or occasional event tickets. Cash and gift cards are never de minimis.
No-additional-cost services: Services the employer already offers to customers, such as standby airline seats for airline staff.
Qualified employee discounts: Discounts on the employer’s products and services within set limits.
Qualified transportation benefits: Transit passes, commuter vehicle rides and qualified parking up to monthly limits that are adjusted each year.
Achievement awards: Tangible property given for length of service or safety, up to $400, or $1,600 under a qualified plan.
Adoption assistance: Excluded up to an annual limit for qualified adoption expenses.

Limits for many of these benefits change from year to year, so always confirm the current figures in the latest edition of Publication 15-B.

Taxable Fringe Benefits

Some benefits are taxable because no exclusion applies, or because they go over an exclusion limit. Common examples include:

Personal use of a company car
Gift cards, cash bonuses and cash allowances
Gym or country club memberships
Group-term life insurance coverage over $50,000
Educational assistance over $5,250 that is not a working condition benefit
Most moving expense reimbursements (for non-military employees)
Vacations and prizes awarded to employees

For guidance on putting a dollar value on these benefits, see our article on how to calculate fringe benefits.

Reporting Fringe Benefits on Form W-2

Employers must include the taxable value of fringe benefits in boxes 1, 3 and 5 of the employee’s Form W-2. Certain benefits also have their own codes in box 12, for example code C for taxable group-term life insurance over $50,000 and code DD for the cost of employer-sponsored health coverage, which is reported for information only and is not taxable. Dependent care benefits are shown in box 10.

When Must Fringe Benefits Be Reported?

Employers can treat taxable non-cash benefits as paid on a pay period, quarterly, semiannual or annual basis, but they must be treated as paid at least once a year. A special rule allows benefits provided in the last two months of the year to be treated as paid in the following year, as long as the employer notifies employees.

Fringe Benefit Tax for Self-Employed Individuals and Partners

Partners and more-than-2% shareholders of S corporations are treated differently from regular employees for several benefits. For example, health insurance premiums paid for a more-than-2% S corporation shareholder are included in the shareholder’s wages, although the shareholder may be able to deduct them on their personal return. These rules are complex, so business owners should consult a tax professional.

Frequently Asked Questions

Is employer-paid health insurance taxable?

No. Employer contributions to an employee’s health coverage are excluded from income. The cost is reported in box 12 of the W-2 for information only.

Are gift cards taxable fringe benefits?

Yes. Gift cards and other cash equivalents are always taxable, no matter how small the amount.

Is a company phone a taxable benefit?

A phone provided mainly for business reasons is a non-taxable working condition benefit, and incidental personal use is also excluded.

Final Thought

Fringe benefit taxation follows a simple starting point — everything is taxable unless excluded — but the exclusions and limits are where the details matter. Employers who track benefits carefully, value them correctly and report them on the W-2 stay compliant and avoid surprises for their employees. To learn more about the benefits themselves, read what are fringe benefits or browse our fringe benefits examples.

This article is for general information only and is not tax advice. Rules and limits change; consult the IRS or a qualified tax professional for your situation.