Taxable Fringe Benefits
Taxable Fringe Benefits
(Last Modified on February 15, 2019)
In general, a fringe benefit is any property or service that an employee (including certain independent contractors) receives in lieu of, or in addition to, regular compensation. Fringe benefits can take many forms. Examples include (but are not limited to) such items as gift certificates, athletic tickets, certain club memberships, spouse/companion travel, automobiles, housing, meals, awards, clothing or prizes.
The following guidance is provided to assist USG institutions and employees in understanding the tax treatment of clothing and gifts, prizes and awards, as well as the reporting and withholding rules that must be followed as the employer.
The guidance below will discuss the general rules, as well as many common situations encountered. References to the Internal Revenue Code (IRC) and Treasury Regulations (Reg.) are provided, along with other IRS guidance that may be helpful. However, the information presented is not intended to be all-inclusive.
Taxability of Fringe Benefits
Fringe benefits are taxable, unless specifically excluded by law. IRC §61; Reg. §1.61-21. The following publications address the IRS’ approach to fringe benefits:
IRS Pub. 15-B Employer’s Tax Guide to Fringe Benefits
IRS Pub. 5137 Fringe Benefit Guide
For a fringe benefit to be taxable, it need not be furnished directly to the employee by the institution, as long as the benefit is provided in connection with the performance of services for the institution. A fringe benefit may be taxable to a person even though the person did not actually receive it. Reg. §1.61-21(a)(4) Example: (1) A vendor may provide clothing or other items as part of a contract with the institution. (2) An employee’s spouse may receive the fringe benefit that is taxable to the employee even though the employee did not receive it.
Valuation
The general valuation rule applies to most fringe benefits. Under this rule, the value of a fringe benefit is its fair market value (FMV). This is the amount an individual would have to pay a third party in an arm’s-length transaction to buy or lease the benefit.
Neither the employee’s subjective perception of the value, nor the employer’s cost, determines the FMV of the benefit. Reg. §1.61-21(b)(2) In many cases, the cost and FMV are the same; however, there are also situations in which FMV and cost differ, such as when the employer incurs a cost less than the value to provide the benefit.
Tax Withholding and Reporting
Taxable fringe benefits for employees will be reported as taxable wages on IRS Form W-2. Most taxable fringes are subject to federal and state income tax withholding, as well as social security and Medicare taxes.
Note: Student workers are considered employees for purposes of this section if they meet common rule requirements and therefore receive a W-2.
Clothing/Uniforms
Clothing/Uniform expenses and allowances are taxable fringe benefits, unless an exclusion applies as outlined below. Please note that there must be a specific business purpose for all clothing purchases – such as job requirement, safety, recruitment, athletic coaches, IT safety, etc. – in order for it to be considered to be purchased using institutional funds. Allowability of clothing other than shirts and t-shirts will be considered on a case-by-case basis.
- Working Condition Fringe Exclusion – IRC §132(d); Reg. §1.132-5
Working condition fringes are generally defined as any property or services provided by an employer that, if paid by the employee, would be deductible as an ordinary and necessary business expense under IRC §§ 162 or 167.
The Tax Court has established three criteria for the cost of clothing/uniform to be considered an ordinary and necessary business expense: TC Memo 2016-79
- The clothing/uniform is required or essential in the individual’s employment;
- the clothing/uniform is not suitable for general or personal wear; and
- the clothing/uniform is not so worn (for general or personal wear).
An employer’s expense, direct or through reimbursement, in providing employee clothing/uniforms that meet all of the above criteria is considered a working-condition fringe benefit, and is not includable in employee wages, thus would be exempt from being taxable.
Examples of clothing items that may be excluded as working condition fringes:
- Uniforms worn by police officers, physical plant workers (not office staff), health care professionals, delivery workers, letter carriers, transportation workers (bus/shuttle drivers, not office staff), moving crews, central receiving workers, and chef’s coats.
- Protective clothing such as safety glasses, hard-hats, work gloves, steel-toed work boots, and other clothing required by OSHA regulations.
- Uniform/clothing that is rented and/or returned to the university and is maintained in a central area where the clothing is issued to the employee. The clothing must be kept and cleaned on university property and reissued on a regular basis. The employee may not assume personal possession of the clothing.
- Uniforms for grounds, maintenance, custodial, farm and field operations and research and food service that meet the characteristics of “torn or stinky” (Madsen v. Commissioner), “bulky, utilitarian in fashion and unsuitable for personal use” (Jackson v. Commissioner) or “dirty and stained” (Cross v. Commissioner).
Please note that an employment contract requiring certain clothing to be worn does not meet the requirement for job exemption taxable benefit for IRS purposes. Items such as polo shirts, windbreakers, etc., although required by the institution as a uniform, would not meet the requirements for job exemption taxable benefit.
- De Minimis Fringe Exclusion – IRC §132(e); Reg. §1.132-6
De minimis fringe benefits are benefits in which the value is so small in relation to the frequency in which it is provided, that accounting for it is unreasonable or administratively impracticable. For purposes of the de minimis exclusion, the term “employee” means any recipient of a fringe benefit. Reg. § 1.132-1(b)(4)
For USG’s purposes, clothing items of nominal value – $75 or less cumulative annually on a calendar year – and provided infrequently – no more than two times per calendar year – may be excluded from taxation as a de minimis fringe benefit. Materials Management and Accounting Services will be tracking these each calendar year by employee.
If either the value or frequency limits are exceeded in the calendar year by the employee, the entire value of the benefit (not just the excess amount) is taxable to the employee. Reg. §1.132-6 (d)(4)
Examples of clothing items that may be excluded as de minimis fringes:
- Low-value clothing bearing the University or department name
- T-shirts provided to employees to wear to promote a campus event
An apparel allowance, or the value of merchandise credit provided to certain employees that allows them to acquire apparel and goods directly from an outside vendor, is a taxable fringe benefit. Please note that the de minimis fringe exclusion above would apply.
Gifts, Prizes and Awards
Cash and cash equivalents, including gift cards, gift certificates, credit/debit cards, bobcat cards, etc. are considered taxable income to the employee regardless of the value and must be included on the employee’s W-2 regardless of value.
Example: The IRS has ruled that wellness program cash rewards or premium reimbursements must be treated as taxable wages. IRS Memorandum 201622031
Non-cash gifts, prizes, and awards are generally considered taxable income to the employee unless they qualify to be excluded as either:
- Employee achievement awards, or
- De minimis (De minimis is defined by the State of Georgia Governor’s Executive Order dated March 30, 2017, as $75 or less).
Please note that employee achievement awards for length of service and safety must comply with the State of Georgia defined de minimis amount in order to not be in violation of the State gratuity clause.
For non-cash gifts, prizes and awards above $75 that are part of a qualified plan award program and are funded with non-institutional resources, the institution should follow IRS taxable fringe benefits guidelines. (IRS Publication 5137
Employee Parking Permits
Due to changes in the IRS tax codes as a result of the Tax Cuts and Jobs Act (TCJA) of 2018/17, parking permits paid for by employees will no longer be considered a pre-tax benefit to employees of the University. Permits paid for by employees will be included in their taxable income on their annual W-2’s.