Are Fringe Benefits Subject to FICA Taxes?

The Federal Insurance Contributions Act (FICA) imposes taxes that fund critical programs: Social Security and Medicare. Social Security provides benefits for retirees, the disabled, and survivors, while Medicare offers health insurance for individuals generally aged 65 and older. Employers often provide compensation to employees beyond their regular wages, known as fringe benefits, which can include various non-cash perks. Understanding how FICA taxes apply to these benefits is important for both employers and employees. Generally, most fringe benefits are subject to FICA taxes, unless a specific exclusion applies under tax law.

General Taxability of Fringe Benefits

FICA taxes are levied on “wages,” a term the Internal Revenue Service (IRS) broadly defines to encompass all remuneration for employment, whether paid in cash or non-cash forms. This wide definition means that the value of most fringe benefits provided to employees is considered wages for FICA tax purposes. Unless explicitly excluded by statute, the fair market value of a fringe benefit must be treated as taxable income. Both the employer and the employee contribute to FICA taxes.

For 2024, employees and employers each pay 6.2% for Social Security taxes on wages up to an annual limit, which is $168,600. Additionally, both parties each pay 1.45% for Medicare taxes, with no wage limit. Employees earning above a certain threshold, such as $200,000 for single filers, also pay an additional 0.9% Medicare tax on earnings exceeding that amount. Common examples of fringe benefits generally subject to FICA taxes include an employee’s personal use of a company car, employer-provided gym memberships, and non-qualified moving expense reimbursements.

Fringe Benefits Exempt from FICA

Despite the general rule, several types of fringe benefits are specifically excluded from FICA taxes by law, providing tax advantages for both employers and employees. One such exclusion is for no-additional-cost services, where the employer incurs no substantial additional cost in providing the service to the employee, such as an airline employee flying free on standby if there is an available seat. Qualified employee discounts on goods or services offered by the employer are also typically exempt, though limitations apply, such as the discount on goods not exceeding the employer’s gross profit percentage.

Working condition fringe benefits, which are benefits that would be deductible as ordinary and necessary business expenses if the employee paid for them, are also excluded. Examples include job-related education that maintains or improves job skills, professional dues, and business travel expenses. De minimis fringe benefits, characterized by their small value and infrequency, are excluded because accounting for them would be administratively impractical. This category includes occasional use of the company copier or small holiday gifts like a low-value gift certificate.

Qualified transportation fringe benefits are exempt up to certain monthly limits. For 2025, employees can exclude up to $325 per month for qualified parking and $325 per month for combined transit passes and commuter highway vehicle benefits. Employer-provided health coverage, including premiums for health insurance plans and contributions to Health Savings Accounts (HSAs), is generally excluded from FICA taxes. Similarly, the cost of employer-provided group-term life insurance coverage up to $50,000 is exempt from FICA taxes. However, the cost of coverage exceeding $50,000 is subject to Social Security and Medicare taxes.

Educational assistance programs allow employees to exclude up to $5,250 per calendar year for tuition, fees, books, supplies, and equipment, provided specific program requirements are met. Dependent care assistance programs also offer an exclusion for benefits provided by an employer, up to $5,000 annually ($2,500 for married individuals filing separately). Finally, adoption assistance programs permit employees to exclude qualified adoption expenses paid by their employer, with a maximum exclusion of $17,280 for 2025.

Valuation and Reporting of Taxable Fringe Benefits

When a fringe benefit is subject to FICA taxes, its value must be determined and reported accurately. The general rule for valuation is to use the Fair Market Value (FMV) of the benefit. Fair Market Value is the amount an individual would have to pay a third party in an arm’s-length transaction to buy or lease the benefit. This valuation should be based on all facts and circumstances, disregarding any special relationship between the employer and employee. Specific valuation rules may apply to certain benefits; for example, the personal use of an employer-provided vehicle can be valued using methods such as the Annual Lease Value, Cents-Per-Mile, or Commuting Rule.

The value of taxable fringe benefits is generally added to an employee’s regular wages and reported on their Form W-2. Specifically, this value is included in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages). This inclusion ensures that FICA taxes are properly withheld from the employee’s pay. The employer is also responsible for paying their matching share of FICA taxes on this added value and must deposit these taxes with the IRS according to the established payroll tax deposit schedules.