Fringe Benefit Tax Basics

• The IRS requires employers to include the value of fringe benefits in the pay of employees. These benefits are taxable just like cash income that is earned. According to the IRS, if a fringe benefit is provided to someone that is not an employee, such as an independent contractor, the provider of the benefit does not owe employment taxes but they must provide the party that rendered services with a Form 1099-MISC and Schedule K-1, or Form 1065, for partners.
  
  

Types

• There many types of fringe benefits that can result in higher income and more income tax. For instance, if your employer allows you to use a company vehicle to commute to work, the value of the benefit is taxable. Other fringe benefits that may be taxed include the use of employer provided athletic facilities, housing provided by an employer and moving expenses.
  
  

Exclusions

• While fringe benefits are taxable compensation, the IRS offers exemptions to many common fringe benefits. For instance, if your employer provides an athletic facility that that they own, however, is only used by employees and their families, the benefit is exempt from taxation. The IRS states that benefits exempt from being included in income tax calculations include: group-term life insurance coverage, retirement planning services, accident and health benefits and adoption assistance.
  
  

Considerations

• Since fringe benefits are often taxable, but they do not provide any actual cash income, they can reduce the total amount of cash you have left over after taxes. On the other hand, fringe benefits often include things that you would have to pay for otherwise if the benefit was not provided for your through an employer, which can save you money. Even if a benefit is taxed, the true cost to you is only a fraction of the benefit's total value. For instance, if your income tax rate is 25 percent, your taxable fringe benefits would only cost you a quarter of their full value in taxes.