Taxable income for an employee consists of any pay that they receive from their employer, including not only their base salary but also any bonuses. The employee will need to pay federal income taxes, state income taxes, and Social Security and Medicare taxes on their taxable income. To offset an employee’s tax burdens, employers often offer tax-qualified fringe benefits in exchange for a reduction in their salary. Not every benefit is tax-qualified, such as the use of a company vehicle for personal purposes. However, benefits that are tax-qualified are completely free of tax obligations at the federal and state levels.
Under the Tax Cuts and Jobs Act, which went into effect in 2018, some types of fringe benefits no longer qualify as tax-free benefits. Most notably, an employee who moves over 50 miles for their job while staying with the same employer can no longer receive tax-free reimbursement for moving expenses.
Fringe Benefits Related to Insurance
Many of the most common benefits involve various forms of insurance. For example, employees often value the health insurance benefits provided by their employers, which may also include coverage for dental and vision insurance. Employers may cover the premiums for disability insurance policies as well, although the employee usually will need to pay tax on benefits paid out under these policies. (They will not need to pay tax if they receive disability insurance payments related to the loss of a limb or a bodily function.)
Employers also may provide group term life insurance up to a certain amount. If they provide life insurance in an amount beyond the threshold, the employee will need to pay tax on the additional amount, but the rate is relatively modest.
Some employees have the option to get long-term care insurance through their employers. This pays for skilled care in nursing facilities and similar settings. Employees will not need to pay tax on the premiums if they are covered by the employer, but they may need to pay tax on any benefits that they receive beyond certain limits.
Fringe Benefits Related to Transportation
An employer can cover the costs of employee parking up to a certain amount. They also can cover the same amount for employees who carpool to work or use mass transportation on their commute. Employees who commute by bicycle may receive a small amount per month for their commuting costs. Under the Tax Cuts and Jobs Act, the employer cannot deduct the cost of most transportation-related benefits, but this does not mean that employees are taxed on them. (There is an exception for transportation benefits that are necessary for an employee’s safety, which may be deducted by the employer.)
Business travel is usually covered by an employer, whether this involves a short local trip or an overnight stay. Employers can allow employees to use company vehicles for business purposes (but not personal purposes) tax-free.
Other Fringe Benefits
An employer may provide up to $5,250 in tax-free fringe benefits each year for the educational expenses of employees. They also may provide up to $5,000 in tax-free child or dependent care assistance. An employee must choose between this benefit and the tax credit for child and dependent care, since they cannot combine them. They will want to consider their total household income and total expenses for child or dependent care when making this decision.
Employers may make many other fringe benefits available to employees, such as discounts on the employer’s products and services, tickets to sports events and concerts, parties for holidays and other occasions, gym and club memberships, and more. These types of benefits tend to be relatively inexpensive ways to boost employee morale. Some employers will encourage employees to purchase stock in their business on favorable terms.