What is Fringe Benefits?

Fringe benefits are any property, service, cash equivalent or other benefit an employer provides in addition to regular pay. The IRS explains the rules in Publication 15-B, Employer's Tax Guide to Fringe Benefits.

Taxable unless excluded

The starting point is that fringe benefits are taxable wages. They become non-taxable only if a specific exclusion in the law applies. Common exclusions include:

• Accident and health plan coverage
• De minimis benefits, such as occasional snacks or a holiday gift of small value, but never cash or gift cards
• Qualified employee discounts within limits
• Working condition benefits, such as a business-use phone
• Qualified transportation benefits within monthly limits
• Dependent care assistance within limits
• Educational assistance within limits

Taxable fringe benefits

Benefits that do not meet an exclusion, such as personal use of a company car or gift cards, must be valued and included in wages, subject to withholding and FICA, and reported on the W-2. Publication 15-B explains valuation methods.

Special rules for owners

Some exclusions do not apply in the same way to more-than-2% S corporation shareholders, partners or sole proprietors. For example, health insurance for S corporation owners is included in W-2 wages; see self-employed health insurance deduction.

In payroll

Set up each taxable fringe benefit as a separate pay item so it is taxed and reported correctly. Review benefits before the last payroll of the year. See accountable plans and our payroll services.

Browse more definitions in the small business glossary.