Employee Benefits as Tax Claims

If you are a business owner, there are a number of other fringe benefits that you may provide to your employees that can also have an impact on your tax liability. The rules and requirements are sometimes convoluted, but it is worth the time investment as the tax deductions can be fairly significant.

Fringe Benefits

Any benefits that are provided outside of an employee’s normal remuneration are classified as “fringe benefits” by the IRS. Some of these benefits are taxable and others are non-taxable. These designations also differ between the ability of an employer able to claim the deduction and whether the employee must also report the benefit for their own income, but the two instances are treated separately by the IRS.

For example even if the benefit is not taxable for the employee’s individual tax return, you (the employer) may still be able to deduct the cost of providing the benefit. These fringe benefits can include company cars, health insurance, educational plans, retirement plans, business provided cell phones, de minimis gifts, and even meals provided on site to maintain productivity. Such fringe benefits are 100% tax-deductible expenses.

The Differences

There are large differences between employee expenses that can be claimed as business expenses and fringe benefit expenses that are also required to be reported on the employee’s gross wage statements. As an example, transportation provided to employees (like a vehicle for commuting to work or even a bicycle) can be written off by the company, but also must be included in the employee’s gross wages at fair market value for income tax purposes.

On the other hand, providing discounts on company products or services (such as tickets to a theatre or sporting events, or use of company property, such as a photocopier) can be provided to an employee tax-free, but are still tax deductible for the employer. Educational assistance, life insurance up to $50,000, dependent care assistance, and tuition reduction fringe benefits are also benefits that are tax-free to the employee and deductible by the company that employs them.

Exclusions and Discriminatory Benefits

As a business, you also need to be careful of fringe benefits that are provided to a discriminate few. Fringe benefits that favor certain employees or are targeted towards only the top employees in the company, do not qualify as a non-taxable benefit for the employee and must be included in their gross wage statements.

The fringe benefits that are excluded from an employee’s gross wages are considered exclusions and each category of exclusion (such as those listed above, including commuting transportation, meals, educational assistance, tuition reduction, cafeteria plans, health benefits, athletic facilities, de minimis gifts, employee stock options, employer provided cell phones, lodging on premises, group term life insurance, moving expenses, and adoption assistance) has its own unique requirements in order to be excluded from an employee’s gross wages as a taxable benefit.

Meet with a tax professional to see how your company’s fringe benefits could be made more compliant with current regulations to provide the best benefits at the least cost.

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