How are Miscellaneous Fringe Benefits Taxed by the IRS

What is a Fringe Benefit?

A fringe benefit is a form of pay for the performance of services. For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work. Any fringe benefit you provide is taxable and must be included in the recipient’s pay unless the law specifically excludes it. Section 2 discusses the exclusions that apply to certain fringe benefits. Any benefit not excluded under the rules discussed in section 2 is taxable.

 

Fringe Benefit Taxation

Before the enactment of § 132 and the amendment of § 61(a)(1) in 1984, many miscellaneous fringe benefits, including items such as employee discounts, free use of the employer’s facilities, and free on-site parking, generally escaped taxation without specific statutory authority. Others, such as the use of company cars for personal purposes, payment of a spouse’s expenses on an employee’s business trip, and payment of club dues, were held to be taxable under the general principles of § 61,114 but in practice these items were often disregarded.

 

What Fringe Benefits Are Taxed?

Attempts by the IRS in the late 1970s to remedy this problem through regulations proved controversial and were frustrated by Congress. Congress finally acted in 1984 by amending § 61(a)(1) expressly to provide that fringe benefits are includable in gross income and adding § 132 specifically to exempt certain miscellaneous employee fringe benefits not already exempt under the battery of preexisting statutory provisions.115 Under the 1984 legislation, all fringe benefits not specifically excluded from gross income are taxable.116 The statutory provisions, however, are vague enough to leave considerable room for interpretation by regulation and IRS ruling. Examples of taxable fringe benefits listed in the regulations include employer-provided automobiles, airplane flights, country club memberships, and tickets to entertainment events that do not fit into any of the statutory exclusions. A taxpayer must include in gross income any fringe benefit “provided…in connection with the performance of services” by the taxpayer, even if another person (a family member, for example) receives the benefit.

 

Including taxable fringe benefits in pay

You must include in a recipient’s pay the amount by which the value of a fringe benefit is more than the sum of the following amounts.

  • Any amount the law excludes from pay.
  • Any amount the recipient paid for the benefit.

If a fringe benefit is taxable, the amount includable in gross income generally equals the fair market value of the benefit, reduced by the amount, if any, paid by the employee for it. The cost to the employer generally is not relevant. The regulations, however, provide mechanical rules for determining the values of many commonly provided fringe benefits, such as a company car available for personal use, flights on a company airplane, and free meals.

 

What are not Fringe Benefits?

Section 132 specifically excludes eight categories of fringe benefits: (1) “no-additional-cost services”; (2) qualified employee discounts; (3) working condition fringes; (4) de minimis fringes; (5) “qualified transportation” fringe benefits; (6) “qualified moving expense reimbursement”; (7) “qualified retirement planning services,” and (8) on-premises athletic facilities. A ninth category of excluded fringes, of somewhat specialized interest, was added to the Code by the Military Family Tax Relief Act of 2003. The new exclusion is for “qualified military base realignment and closure fringes,” defined by § 132(n) as certain payments made “to offset the adverse effects on housing values as a result of a military base realignment or closure.” As amended by the Worker, Homeownership, and Business Assistance Act of 2009, § 132(n) also applies to Defense Department Homeowners Assistance Program payments authorized under the American Recovery and Reinvestment Tax Act of 2009. Each of these excluded benefits is discussed below.