Ever heard the saying “There is no such thing as a free lunch?”
Well, it can be true for the IRS, because if your employer provides that lunch free of charge, then the IRS could tax you on it.
Fringe benefits have come under focus in recent years as a result of increasing IRS scrutiny. So employers are more apt to follow the strict letter of IRS code and classify your benefit as an unqualified fringe benefit. Unqualified fringe benefits are subject to taxation as if they were normal income.
Your W2 may not even distinguish the value of your fringe benefit income in Box 14 or as a separate attachment, as some W2s do. Instead, what is determined as the Fair Market Value (FMV) of the good will be added to your income and taxed. I posted on one example of this last week under Why your employer’s gym membership perk may cost you at tax time.
That said, there are specific exemptions, or types of fringe benefits that qualify as tax-free. These could include:
- Accident and Health Benefits
- Achievement awards
- Adoption assistance
- Athletic facilities
- De minimis benefits – See below for more details
- Dependent Care Assistance
- Educational Assistance - See my posting, “Will I Be Taxed for Employer Tuition Assistance?”
- Employee discounts
- Employee stock options
- Employer-provided cell phones
- Group-term life insurance coverage
- Health savings accounts
- Lodging on your business premises
- Moving expense reimbursements
- No-additional-cost services
- Retirement planning services
- Transportation benefits
- Tuition reduction
- Working condition benefits
Keep in mind that all of the above benefits could be tax-free but only if certain criteria are met. De minimis benefits can be the biggest surprise come tax time.
When is a benefit considered a De Minimis benefit?
De minimis (aka minimal) benefits are those considered any property or service that has so little value that it would be impracticable to affix the good to your employer’s tax return. Examples include photocopies, snacks, holiday gifts, cab fares and flowers. (Cash and cash equivalents, such as gift cards, are always taxed.)
These are normally untaxed because the value of each good is so small, but repeated instances of any of the above can shift the taxless benefit into fringe territory.
If your boss buys you a cup of coffee, then it is clearly untaxed. But what if that happened every week? Would that count as a de minimis benefit?
As a general rule of thumb, if a repeated expense is close to exceeding $75, then it could be taxed, and your employer should be including it on your income statement.
One coffee would be ok, but one coffee per week would be:
48 weeks per year x $3 for each coffee=$144
Even though one coffee would be excluded as a minimal benefit, the aggregate would be taxable.