:max_bytes(150000):strip_icc()/GettyImages-1163989938-32a46d2f678f4019995e45b5f07e650e.jpg)
Melissa Horton is a financial literacy professional. She has 10+ years of experience in the financial services and planning industry.
Updated February 12, 2024 Reviewed by Reviewed by Lea D. UraduLea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.
Fact checked by Fact checked by Suzanne KvilhaugSuzanne is a content marketer, writer, and fact-checker. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands.
Common fringe benefits provide employees with compensation above and beyond their wages or salaries.
A wide range of fringe benefits is offered by employers. These include health insurance premiums, child care, transportation vouchers, and retirement account matching contributions.
To take advantage of an employer’s fringe benefits in the most effective way, employees need to understand how common fringe benefits are taxed.
Fringe benefits are generally considered taxable income if the employer pays them to their employees in cash. So bonuses or reimbursements for expenses paid while on the job are considered taxable. These benefits must be included on an employee’s W-2 each year, and the fair market value (FMV) of the bonus is subject to withholding.
The most common fringe benefits that are considered a taxable part of total compensation include:
For taxpayers who claim a mileage deduction, the standard mileage rate for business use is 65.5 cents per mile in 2023. The rate increases to 67 cents per mile in 2024. Any amount that exceeds this limit is considered taxable as income. For example, for tax year 2023, if a company reimburses its employee 70 cents per mile, then the remaining 4.5 cents per mile is taxable.
Employers can exclude up to $5,250 from an employee's wages for education-related assistance provided that assistance was offered under a qualifying program. Amounts exceeding this threshold are taxable as ordinary income.
Moving expenses can only be claimed if you are "on active duty and, due to a military order, you move because of a permanent change of station," according to the IRS.
There is a lengthy list of common fringe benefits that are excluded from an employee’s taxable compensation.
In-kind payments, which means the employee gets the benefit in lieu of cash, are non-taxable. So someone who receives accommodations from their employer so they can do their job won't be taxed for that benefit.
Another type of fringe benefit that isn't taxed is called a de minimis benefit. This type of benefit is one that holds such a minimal value that employers would have a difficult time accounting for it.
Among others, de minimis benefits include the employee use of the photocopier and items such as holiday gifts, flowers, and refreshments or snacks provided during a business meeting.
Gift certificates that are redeemable for merchandise or have a cash equivalent value are not considered de minimis benefits and are taxable.
Meals are not considered a taxable fringe benefit for employees, although certain qualifications must be met. Employers buying lunch or dinner for employees must provide the meal on business grounds, and it must be offered as a benefit to the employee.
This means a meal could be a tax-free benefit to employees when offered during a lengthy meeting or during required overtime.
Other fringe benefits that are not considered taxable to employees include:
Awards given for achievements are exempt from tax withholding and are also deemed not taxable.
Remember: Taxes for the current year are filed in the following year. That means that you file 2023 taxes in 2024 and 2024 taxes in 2025.
You may be wondering about the tax status of certain government-sponsored benefits like unemployment and workers' compensation.
Unemployment insurance (UI) is taxable at the federal level but not every state imposes a tax on this benefit. Unemployment insurance temporarily provides unemployment benefits to certain workers who lose their jobs.
To qualify, the worker must not have caused the job loss, must have worked for a specific period and earned a certain amount as determined by their state of residence, and must be actively looking for employment.
Worker's compensation is exempt from taxation at the federal or state level as long as the benefits are received "for an occupational sickness or injury."
The program, which is organized under the Department of Labor's Office of Worker's Compensation Programs, provides compensation to federal workers who are injured at work or acquire a disease from work. Benefit recipients are compensated with money, medical treatment, vocational rehabilitation, or other benefits.
In addition to these government-sponsored programs, some employers offer health plans—one of the most desired benefits—to their employees. Companies that fund their employees' health insurance plans do not have to withhold Social Security, Medicare, FUTA, and federal income taxes from that benefit.
Fringe benefits may be taxed at the employee's income tax rate, or the employer may elect to withhold a flat supplemental wage rate of 22% on the benefit's value. If the value of benefits exceeds $1 million in a year, the supplemental wage rate is 37%.
The IRS allows several fringe benefits to be excluded from taxes. This list includes (but is not limited to) adoption expenses, group-term life insurance, retirement planning services, and de minimis benefits, such as certain meals and employee parties.
Most fringe benefits are included in an employee's gross income. As such, they are subject to withholding and employment taxes. The employer records the amount "by which the fair market value of the benefits is more than the sum of what the employee paid for it plus any amount that the law excludes." Not all fringe benefits are taxable, which means that they are excluded from an employee's gross income. The IRS has a full list of exclusions available through its website.
Yes, taxable fringe benefits are reported on an employee's W-2. These are included under wages, tips, and other compensation in the total in box 1 of the form. Although not required, employers may also choose to include the total in box 14 (marked Other) or on a separate sheet.
Employers offer a wide range of fringe benefits as a recruitment or retention strategy. These benefits can make up a substantial portion of an employee’s total compensation.
To fully compare the benefits packages offered by employers, it is important to understand how common fringe benefits are taxed.
Correction—April 3, 2024: A previous version of this article incorrectly defined gift cards as de minimis items.
Article SourcesThe offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Description Related Articles
:max_bytes(150000):strip_icc()/GettyImages-1468684796-086b1a840e4c4532b231d7973a9d0f1c.jpg)
:max_bytes(150000):strip_icc()/investing4-5bfc2b8ec9e77c0026b4f956.jpg)
:max_bytes(150000):strip_icc()/GettyImages-1821169669-d43e9eaaaa8d4e8984101d070cbcdbbd.jpg)
:max_bytes(150000):strip_icc()/GettyImages-1332230003-793d9594ed6c4ca792ecc547939319d5.jpg)
:max_bytes(150000):strip_icc()/StepstoTakeBeforeYourPrepareYourTaxes-ce2597fb6e644b2788a6f20a8272fed1.jpg)
A qualified higher education expense is a tax credit for the parents of students attending a college or other post-secondary institution.
A filing extension is an exemption made for taxpayers who are unable to file their federal tax return by the regular due date.
A flow-through entity is a legal business entity that passes income to the owners and/or investors of the business. It's sometimes referred to as a disregarded entity.
A widow(er)'s exemption is one of several forms of state or federal tax relief available to a surviving spouse in the period following their spouse's death.
Tax liability is the amount an individual, business, or other entity is required to pay to a federal, state, or local government.
Section 1341 is a tax credit from the I.R.S. available for taxpayers who have to repay more than $3,000 in wages from a prior year.
We and our 100 partners store and/or access information on a device, such as unique IDs in cookies to process personal data. You may accept or manage your choices by clicking below, including your right to object where legitimate interest is used, or at any time in the privacy policy page. These choices will be signaled to our partners and will not affect browsing data.
Store and/or access information on a device. Use limited data to select advertising. Create profiles for personalised advertising. Use profiles to select personalised advertising. Create profiles to personalise content. Use profiles to select personalised content. Measure advertising performance. Measure content performance. Understand audiences through statistics or combinations of data from different sources. Develop and improve services. Use limited data to select content. List of Partners (vendors)
