Updated December 2016
Health coverage. Meals. Life insurance. Parking fees and transit passes. Flexible spending accounts. Even employer-provided cell phones. Bet you’re getting some kind of employer-provided fringe benefits in addition to your salary.
But do you know which fringe benefit the IRS considers taxable? Which benefits are also subject to employment taxes? And how fringe benefits affect your estimated taxes?
It can be incredibly confusing under the best of circumstances—and it’s especially complicated for partners, as well as members of LLCs and certain shareholders in S corporations.
But unless you have a general understanding of how your fringe benefits are taxed, it’s difficult to know what you’re really earning and what you’re paying in taxes. It also complicates tax planning and calculating estimated tax payments or withholdings.
Fringe benefits are forms of compensation, in addition to wages or salary, that are provided for the performance of services.
As a general rule, fringe benefits are taxable and must be reported as income—unless you paid for the benefit yourself or the law specifically excludes such tax treatment. Taxable benefits may also be subject to withholding for income taxes, Social Security and Medicare.
The reporting requirements and tax implications associated with fringe benefits vary by benefit and the type of person receiving the benefit—e.g., employee, partner, member or shareholder. The rules are particularly complicated for the following:
partners in partnerships
members of LLCs that are taxed as partnerships
shareholders of S corporations who own more than two percent of the company’s stock
If you’re an S corporation shareholder as described above, your fringe benefits are generally considered additional compensation for both income and employment tax purposes, and are reported on your W-2.
If you’re a partner in a partnership or a member of an LLC, your fringe benefits are generally considered guaranteed payments or other compensation for income and self-employment tax purposes and are reported on your Schedule K-1.
Naturally, there are exceptions to the general rules: Certain fringe benefits aren’t taxable to partners, LLC members or two-percent S corporation shareholders. Instead, they are accorded the same advantageous tax treatment as employees.
The following table lists common fringe benefits that are generally taxable.
|Fringe Benefits, Subject to Tax|
|Health benefits: medical, dental, vision, accident|
|Employer contributions to health savings accounts (HSAs)|
|Employer contributions to flexible spending arrangements (FSAs)|
|Dependent care benefits, up to $5,000 annually|
|Group-term life insurance coverage, at 100 percent|
|Qualified transportation and parking benefits|
|Reimbursements for qualified moving expenses|
|Adoption assistance benefits|
|Educational benefits under qualified assistance programs, up to $5,250 annually|
With reference to other fringe benefits, partners, LLC members and two-percent S corporation shareholders are typically treated as employees when it comes to income and employment taxes.
It is important to note that the favorable tax treatment for many of these benefits is subject to limits or other requirements. In particular, some benefits need to be provided under an “accountable plan.” That means the employee, partner, or shareholder needs to report the expenses, with receipts, to be reimbursed.
|Fringe Benefits, Not Subject to Tax|
|Cell phones, provided for noncompensatory business reasons|
|On premises athletic facilities, owned or leased|
|Minimal value (de-minimis) benefits, excluding cash and gift cards|
|Minimal value (de-minimis) meals|
|Retirement planning services, under employer’s qualified plan|
|Working condition benefits|
|Lodging on business premises|
|Meals on business premises, provided for convenience of the employer|
|Services provided at no additional cost to employer|
The rules for taxing fringe benefits are particularly complex and include many exceptions. If you have questions about how they impact you or your business, give us a call to discuss your specific situation.