14 Tax-Favored Fringe Benefits: What’s the Right Mix for Your Business?
Job applicants look at more than just wages when evaluating potential employers. They consider the whole compensation package, including fringe benefits and perks. These add-ons enable employers to cast a wider net in the job market, helping them attract and retain top-quality workers.
Unfortunately, tax breaks for some fringe benefits were eliminated or suspended by the Tax Cuts and Jobs Act (TCJA). Some other fringe benefits, however, are still deductible by employers and tax-free to employees.
Here are 14 popular benefits that remain on the books after the TCJA.
1. Achievement awards. The tax law defines an “achievement award” as an item of tangible personal property granted to an employee for either length of service or promoting safety. Examples include gold watches and smartphones. For a written qualified plan, the maximum tax-free award is $1,600, while the maximum for a nonqualified plan is $400.
2. Athletic facilities. Employees can benefit from tax-free use of an onsite athletic or health club facility if the employer operates it. Such a facility is available to the employee, his or her spouse, and any dependents. Furthermore, it may be used by retired employees and shareholder-employees. This category of benefits includes gyms, tennis courts, and pools.
3. Company vehicles. As a general rule, the use of a company-provided vehicle for business is tax-free to the employee. However, the value of personal use (other than “de minimis” use) must be included in the employee's taxable income, based on special IRS computations.
4. De minimis benefits. These tax-free perks can range from free use of the company's copying machine for personal reasons to free coffee, soft drinks, and donuts. It also includes most birthday gifts from the company and holiday hams or turkeys.
5. Dependent care assistance. The first $5,000 of dependent care assistance paid by an employer under a written plan is tax-free to employees. To qualify, the dependent must be:
- A child under age 13,
- A child who is physically or mentally unable to care for himself or herself, or
- A spouse who is physically or mentally incapable of self-care.
However, the amount of the exclusion can't exceed the earned income of a single employee or the earned income of the lower-paid spouse if the employee is married.
6. Educational assistance plans. A company can provide tax-free payments of up to $5,250 for college or graduate school tuition, books, fees and supplies under an educational assistance plan. The courses covered under the plan do not have to be related to the job. But any payments for courses involving sports, games or hobbies are covered only if the course is job-related or required as part of a degree program.
7. Employee discounts. A company can provide tax-free discounts to employees on its products or services. For products, the discount percentage can't exceed the gross profit percentage of the price at which the product is offered to regular customers. For services, the discount percentage can't be more than 20% off the price at which the service is offered to regular customers.
8. Group-term life insurance. This is usually a prized perk for highly-paid executives, even though there's a tax price attached to “excess” coverage. Only the first $50,000 of coverage under a group-term life insurance plan is tax-free. For instance, if an executive earning $150,000 is covered at three times salary, he or she owes tax on $400,000 of coverage ($450,000 - $50,000). The tax hit, which is computed under an IRS table based on the employee's age, is generally reasonable.
9. Health insurance. Premiums paid by an employer under a health insurance plan are tax-free to the employees and deductible by the employer as long as the plan is open to rank-and-file workers. Additionally, employees can take advantage of tax-favored flexible spending accounts (FSAs) for qualified healthcare expenses and Health Savings Accounts (HSAs) funded by employers.
10. Mobile phones. The value of the business use of an employer-provided mobile phone provided primarily for noncompensatory business reasons is excluded from taxable income. Generally, this covers employer-provided devices that are to be used for business purposes.
11. Professional and civic organization dues. Dues paid by an employer on behalf of employees to professional and civic organizations are tax-free. But there must be a business purpose to having membership in the organization. It can't just be a social club.
12. Qualified retirement plans. Generally, contributions provided under 401(k), pension, profit-sharing or other qualified retirement plans are exempt from tax and these amounts can grow without any current tax erosion until employees make withdrawals. Also, contributions are subject to generous annual limits, including potential matching contributions to a 401(k) by an employer, but strict nondiscrimination requirements must be met.
13. Supper money. This is tax-free to employees if it's 1) provided only on an occasional basis and 2) due to special circumstances. In the case of meals or meal money, the benefit must be provided to enable the employee to work overtime, even if the need to work overtime was foreseeable. The employer can deduct 50% of the cost.
14. Working condition fringe benefit. This includes property or services provided to employees so they can do their jobs. Examples include job-related education and business-related travel costs.
Some TCJA Provisions Could Cost You
The Tax Cuts and Jobs Act (TCJA) includes tax breaks for both individuals and businesses. But some breaks were limited or eliminated. Notably, the rules for some employer-provided fringe benefits are less taxpayer-friendly than before.
For example, tax-favored treatment for certain transportation fringe benefits has been cut by the TCJA. Employers can no longer deduct the cost of providing commuting transportation to an employee (such as hiring a car service) unless the transportation is necessary for the employee's safety. Employers also can't deduct qualified employee transportation fringe benefits, such as parking allowances, mass transit passes, and van pooling. These benefits are still tax-free to recipient employees. But the tax-free amount can't exceed a maximum monthly dollar limit, adjusted for inflation, which is $265 for 2019.
The TCJA also temporarily eliminates tax-free employer reimbursements for job-related moving expenses (except for certain military personnel). Any employer reimbursements must be reported as taxable income on a nonmilitary employee's W-2. This provision is effective for 2018 through 2025.
In addition, under the TCJA, employers can deduct only 50% of the cost of meals provided via an on-premises cafeteria or otherwise on the employer's premises for the convenience of the employer. (Under the pre-TCJA rules, these meals were 100% deductible by the employers and tax-free to the recipient employee.)
After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer's premises won't be deductible at all. Nevertheless, the meals will continue to be tax-free to employees as a de minimis benefit.
Other benefits that remain taxable to employees and nondeductible by employers under current law include:
- Excessive mileage reimbursements,
- Excessive education benefits,
- Work clothing suitable for regular wear,
- Cash awards and prizes, and
- Personal use of a company vehicle.
As you can see, there are still plenty of opportunities for employers to reward employees with tax-free benefits even after the TCJA changes. Contact your tax advisor to discuss the best options for your situation.