Certified Public Accountants

Fringe Benefits

As of 1985, gross income does not include any fringe benefits that qualifies as one of the four categories listed below. Fringe benefits that qualify for the exclusion are exempt from income tax and Social Security tax withholding (FICA and payment of Federal Unemployment Tax (FUTA)). Conversely, benefits which do not qualify are subject to these taxes. An example of a common non-qualifying benefit subject to tax is the automobile allowance.

No additional cost service. This is a service provided to an employee that is excludable if the service is offered for sale to the public in the ordinary course of the line of business of the employer in which the employee is working and the employer does not incur substantial additional cost. For example, if employers furnish airline travel or hotel rooms to employees working in these lines of business in such a way that the nonemployee customers are not displaced, they incur no substantial additional cost in providing those services to the employees.

Qualified employee discount. Any employee discount is an excludable qualified employee discount if: (1) in the case of property, it does not exceed the gross-profit percentage of the price at which the property is being offered to customers; (2) in the case of service, it does not exceed 20% of the price at which the service is being offered.

Working condition fringe. Any employer-provided property or services are excludable benefits to the extent that they are deductible as ordinary and necessary business expense had the employee paid for them. Under certain conditions, the fair market value of a qualified automobile demonstration used by a full time auto salesperson is an excludable working condition fringe.

De minimis fringe. Property or services not otherwise tax-free are excludable if their value is so small as to make accounting unreasonable or administratively impractical. An operation of any eating facility for employees is an excludable de minimis fringe if it is located on or near the employer's business premises and the revenue derived normally equals or exceeds the direct operating costs of the facility.