Sit down with the oat milk latte you grabbed from the staff lounge (is it free?), and let’s find out which company benefits are taxable.
Remember when your mom said nothing good in life is free? Hate to tell you, but she was right.
When your employer offers so-called fringe benefits, or extras like a gym membership, bicycle allowance, moving allowance, or NBA tickets, it may cost you because so many fringe benefits are considered taxable income. But before you cancel that gym membership, take a breath. We’ll explain what is tax-exempt and what you will have to pay for. Sit down with the oat milk latte you grabbed from the staff lounge (is it free?) and let’s dig in.
What are fringe benefits?
Also known as company perks or benefits, the IRS defines a fringe benefit as a form of payment in exchange for services. Some work perks are considered taxable and subject to all the same taxes as your salary, including federal and state income taxes, Social Security, and Medicare.
The IRS is very specific about what is and what is not tax-free, and—to make things more confusing—some benefits are exempt only until a certain amount or percentage of use. If you want to understand the nitty-gritty, the government publishes and regularly updates its extensive policies in Publication 15-B and Publication 5137.
Here’s how fringe benefits work: With notable exceptions, these perks are taxable and your employer must report them as income on your W-2 (for employees) or form 1099 (for independent contractors).
Put another way, taxable fringe benefits are taxed at your highest marginal tax rate. Say you receive $1,000 in annual taxable fringe benefits, and you’re in the 32% tax bracket; you’ll owe $320 on the benefits received. So while you’re still paying to enjoy the benefit, you’re getting a pretty sweet discount.
Which fringe benefits are taxable?
Gift cards and cash awards
That $20 Chipotle gift card you got for winning trivia at your annual work party? Taxable.
Any time your employer hands out a cash prize or gift card, the IRS considers it a taxable benefit. Regardless of the amount, these perks are reported as taxable income.
Off-site club memberships
If your employer pays for or subsidizes your membership to a gym, social club, or country club, you’re living the good life. But if you use these clubs for personal reasons (and you likely do), then the percentage of time for non-business use is subject to taxation. If you use the club for business reasons, then that share is non-taxable. You’ll want to keep track of those details.
Personal use of company vehicles
Getting keys to a company car is one of the most common fringe benefits. When you’re driving around making sales calls or heading to meetings, that’s work-related use and tax-exempt. However, if you use the vehicle for personal use (such as using that gym membership), then that portion of the usage is considered taxable.
Tickets to sports and entertainment
If your boss hands you free tickets to a Rangers game or concert at Madison Square Garden, that’s a score. Unless you’re attending for a work-related reason or a large number of your coworkers also attend, those tickets are considered a taxable benefit. Enjoy the show, but know the ticket value will be reported, and you’ll be responsible for the taxes.
To coax staffers back to the office, your company might offer a clothing allowance (yes, you can find work clothes with elastic waists, don’t worry). While this might sound like a sweet perk, before you hit Zara or browse for vintage blazers, remember your clothing allowance is taxable.
If you’re relocating and your employer offers a moving allowance, consider yourself lucky. Moving is expensive and every dollar helps. A relocation allowance helps cover travel expenses, movers, meals, and hotels. However, whether your employer provides you with a lump sum or pays a third-party vendor, you’re responsible for the tax on those payments.
Which fringe benefits are tax-free?
Now that we’ve given you the bad news, let’s switch gears and talk about tax-free fringe benefits. Many of these perks deliver important financial, personal, and professional benefits.
De minimis benefits
According to IRS rules, small benefits, including goods and services, that are infrequent or of nominal monetary value and would be unreasonable to account for are considered tax-free. That could be occasional fare for a ride-share home from work late at night or lunch on a rare Saturday workday. Other examples include the infrequent personal use of a company-supplied cell phone, small birthday or holiday gifts, coffee, snacks, and donuts in the breakroom, and using the company photocopier or printer for occasional personal projects.
While many people don’t log long commutes anymore, some folks still have to go into the office. When you do travel, the expenses can add up quickly, and employers have stepped up with incentives to lessen the sting. According to IRS rules, for 2022, the monthly tax-free allowance for qualified parking, monthly commuter highway vehicle transportation, and transit passes is $280.
Health, dental and vision benefits
When your employer makes contributions to a health plan, those benefits are non-taxable.
On-site or employer-owned health facilities
To encourage mental and physical wellness, some employers offer on-site or owned fitness facilities, including gyms, tennis courts, and pools. When you have access to an employer-operated center, that’s considered a non-taxable benefit. (You’ll have to decide if it’s worth running into your boss in the locker room.)
If your employer offers tuition assistance or tuition reimbursement, that’s a great way to continue professional development without taking on more debt than necessary. However, only some education benefits are tax-free and there can be a cap. To determine your eligibility, talk to your employer and consult the IRS guidelines.
Are fringe benefits a privilege or a burden?
If you were stoked about your company’s fringe benefits, sorry to burst your bubble. But it’s not all bad: Your employer can give you access to products and services you might not be able to get on your own, but it may cost you. You’ll have to decide what’s worth it.