Are Fringe Benefits Deductible for the Employer?
A fringe benefit is any non-wage form of compensation and is usually offered by an employer as both an employee incentive and a way to reduce taxes. In fact, many fringe benefits are tax-advantageous to both the employer and the employee. There are limits to this, and some fringe benefits do not provide a tax deduction, or they have a set limit on the amount that may be used for tax-savings purposes. All fringe benefits provided by an employer are technically considered taxable unless an exception is made. Fortunately, many forms of benefits are made at least partially deductible.
Health insurance is a very common fringe benefit provided by employers. If the owners of the policies pay for premiums on behalf of employees, those premiums are not taxed and may be deducted by the business. Other tax-free and tax-deductible benefits include dependent care assistance, educational assistance, and commuting services. Deductions are not limitless; for instance, educational assistance programs have a maximum deduction set by the Internal Revenue Service, or IRS.
Fringe benefits do not necessarily have to be offered to a direct employee; independent contractors, partners, or directors may all be recipients. The tax treatment of benefits and their recipients are discussed in length in IRS Publication 15-B, specifically Table 2-1. Any fringe benefit not discussed in Section 2 is considered fully taxable.
Employees also benefit from so-called no-additional-cost services, which include a benefit or service that is typically provided to customers at no additional cost or lost revenue. The value of such services is not taxable to the employee. It is important for employers to keep an eye on discrimination rules that apply to the offering of benefits. In many circumstances, benefits offered to only a select group of employees can lose their tax-advantaged status.