Publication 15-B (2016): Rules for Taxing Fringe Benefits

This article addresses the rules in the IRS Employer’s Tax Guide to Fringe Benefits. This guidance provides a framework for employers to identify which benefits are taxable wages, how to value them, and which can be excluded from an employee’s income. Understanding these distinctions is necessary for maintaining compliance with federal tax obligations.

General Valuation Rules for Fringe Benefits

The value of a fringe benefit is its fair market value (FMV). This is the amount an employee would have to pay an unrelated third party to purchase or lease the same benefit. The valuation is based on objective market facts, not the employer’s cost to provide the benefit or the employee’s personal perception of its value.

Unless a specific rule in the tax code provides an alternative method, the FMV standard is the default. For example, if an employer allowed an employee to use company equipment for personal tasks, the value of that benefit is what the employee would have paid to rent similar equipment. This requires the employer to determine a reasonable, arm’s-length price for the benefit provided.

Excludable (Non-Taxable) Fringe Benefits

The Internal Revenue Code allows employers to provide certain fringe benefits to employees without including the value in their taxable income.

• Accident and Health Benefits: Employer contributions to a qualifying accident or health plan are excludable from an employee’s income. This includes coverage for the employee, their spouse, and their dependents.
• Achievement Awards: An award of tangible personal property for length of service or safety is not taxable if it meets certain criteria. The exclusion is limited to $400 for non-qualified plans or up to $1,600 for qualified plans. Cash or cash equivalents are always taxable.
• De Minimis Benefits: Property or services with a value so small that accounting for them is unreasonable or administratively impractical are excludable. Examples include occasional personal use of a company copy machine or occasional tickets for entertainment events.
• Educational Assistance: An employer can provide up to $5,250 annually in tax-free educational benefits for undergraduate and graduate courses. Through 2025, this exclusion also applies to employer payments made toward an employee’s qualified student loan debt.
• Employee Discounts: For services, a qualified discount cannot exceed 20% of the price offered to customers. For merchandise, the excludable discount is limited to the employer’s gross profit percentage. Any discount exceeding these limits is taxable income.
• Group-Term Life Insurance: An employer can provide up to $50,000 of group-term life insurance coverage tax-free. The value of coverage exceeding $50,000, less any amount paid by the employee, must be included in wages using an IRS-provided table based on the employee’s age.
• Working Condition Benefits: These benefits are excludable to the extent that the employee could have deducted the cost as a business expense if they had paid for it themselves. This includes the business use of a company car, job-related training, or professional publications.
• Retirement Planning Services: General retirement and financial counseling provided to an employee and their spouse is excludable if the employer maintains a qualified retirement plan. The exclusion does not cover tax preparation, accounting, legal, or brokerage services.

Taxable Fringe Benefits

Any fringe benefit is taxable income unless the law specifically excludes it. The fair market value of the benefit must be included in an employee’s pay and is subject to federal income tax withholding, Social Security, and Medicare taxes.

Cash awards and bonuses are taxable fringe benefits. Unlike certain achievement awards of tangible property, any benefit paid in cash or a cash equivalent, such as a gift card, is fully taxable as wages regardless of the reason for the award.

For tax years 2018 through 2025, most moving expense reimbursements paid to an employee are taxable income. The exclusion for qualified moving expense reimbursements is suspended for all taxpayers except for active-duty members of the U.S. Armed Forces who move due to a permanent change of station.

Special Rules for Vehicle Benefits

The IRS provides specific valuation rules to determine the taxable amount of an employee’s personal use of a company vehicle.

Annual Lease Value Rule

This method requires the employer to determine the vehicle’s fair market value (FMV) on the date it is first made available to the employee. Using the “Annual Lease Value Table” from that year’s IRS publication, the employer finds the corresponding annual lease value. To calculate the taxable portion, the employer multiplies this lease value by the percentage of miles driven for personal use. The value of fuel provided by the employer for personal use must be added separately.

Cents-per-Mile Rule

An employer can use this rule if the vehicle’s FMV does not exceed a certain amount and the vehicle is used regularly in the employer’s business. The value of personal use is calculated by multiplying the total personal miles driven by the standard mileage rate, which for 2025 is 70 cents per mile. This rate includes the value of fuel, maintenance, and insurance.

Commuting Rule

This rule allows an employer to value personal use at $1.50 for each one-way commute, or $3.00 for a round trip. To use this method, the employer must have a written policy prohibiting any personal use of the vehicle other than commuting. This rule is only applicable to “non-control” employees, meaning it cannot be used for highly compensated employees or company directors or owners.

Withholding, Depositing, and Reporting

Once an employer determines a fringe benefit is taxable, they must handle the associated employment taxes. Employers can add the value of taxable fringe benefits to an employee’s regular wages for a payroll period and calculate income tax withholding on the total.

Alternatively, employers can withhold federal income tax on the benefit’s value at the supplemental wage rate of 22% for supplemental income up to $1 million in a calendar year. For supplemental wages exceeding $1 million, the rate is 37%. Social Security and Medicare taxes are still calculated and withheld based on their standard rates.

A “special accounting rule” allows employers to treat the value of non-cash fringe benefits provided during the last two months of the year as if they were paid in the following year. This election, once made, must be used consistently for all employees and allows more time to calculate the value of year-end benefits.

The employment taxes on taxable fringe benefits must be deposited according to the employer’s regular deposit schedule. The total value of these benefits is included in the amounts reported on the employer’s quarterly tax return, Form 941. On the employee’s annual Form W-2, the value is included in Box 1 (Wages), Box 3 (Social Security wages), and Box 5 (Medicare wages).