Tax Free Fringe Benefits
The tax code has certain types of income that is tax free to the recipient and is fully deductible by the employer. This type of income is called tax-free fringe benefit income. There are various types of fringe benefit income which fall under Code Section 132 of the IRS code. There are five general categories of fringe benefit income which will be discussed here.
No Additional Cost Service
No additional cost services are provided by an employer to an employee and are excluded to from gross income and wages and are excluded as a fringe benefit. No additional cost services are free services provided to the employee in which the employer incurs no additional cost in providing the service. An example would include free air travel to airline workers or free tickets to a sporting event for the employees of the ballclub.
Qualified Employee Discount
Discounts provided to employees on their purchase of qualified property or service of their employer are excluded from gross income. In the case of merchandise, the discount cannot exceed the gross profit percentage of the price which the property is being offered to customers. For services, the discount cannot exceed 20% of the service price being offered to customers.
De Minimis Fringe Benefit
If the value of any property or service provided to an employee is so minimal that accounting for the property or service would be unreasonable or administratively impracticable for an employer it is a de minimis fringe benefit that is excluded from the employee’s gross compensation. Examples would include use of company copier, occasional parties or picnics, company provided coffee and doughnuts, and tickets to sporting events.
Working Condition Fringe Benefits
Working condition fringe benefits are not taxable to the employee and are excluded from income provided that the cost of the property or service would have been deductible by the employee as a business expense had the employee bought the item or paid for the service on his own. Examples would include use of company vehicle, airplane transportation, cell phone use, and various types of entertainment expenses.
Health and Welfare Plans
There are many types of health insurance and welfare plans in which the employer will pay for the cost of the employees health insurance coverage or other types of insurance and the cost provided to the employee is excluded from gross income and is fully deductible by the employer. These types of fringe benefits would section 125 cafeteria plans, group term life insurance, and disability insurance.
There are many other types of fringe benefit plans that are not included here. But most types of fringe benefit plans fall under these five main categories.