Fringe benefits: What they are and how to handle them
Explore fringe benefits, their tax implications, and how to effectively report them in payroll.
Fringe benefits: What they are and how to handle them
Goals and takeaways
- Understand how fringe benefits are defined under the Internal Revenue Code
- Identify which benefits are taxable, partially taxable, or excludable
- Learn how and when to report fringe benefits in payroll
What are fringe benefits?
Under IRC §61, fringe benefits are considered taxable compensation unless a specific exception applies. Any noncash benefit provided in exchange for services is generally taxable and subject to employment taxes unless excluded under another section of the code.
Fringe benefits can include:
- Cash or noncash awards
- Personal use of company property
- Subsidized commuting or parking
- Company-provided memberships or entertainment
Some benefits are fully taxable, others are excludable under specific conditions, and many fall into a conditional category based on their value or usage.
Tax treatment of fringe benefits
Fringe benefits are considered wages not paid in money and must be valued at fair market value (FMV). The FMV is the price the employee would pay on the open market in their geographical area.
Reporting taxable fringe benefits
Fringe benefits must be reported in payroll either:
- When they are provided
- Or, at minimum, by December 31 of the year in which they are provided
Example: If an employee receives a $4,200 TV at a company event (even if donated), and the employee pays $15 and $280 is excludable by law, the includable amount is:
$4,200 - ($15 + $280) = $3,905 included as taxable income.
Use this formula:
IFBA = FMV - (EPA + AEL)
Where:
- IFBA = Includable Fringe Benefit Amount
- FMV = Fair Market Value
- EPA = Employee Paid Amount (after-tax)
- AEL = Amount Excludable by Law
Withholding and deposit timing
Fringe benefits are considered supplemental wages and are subject to:
- Federal income tax withholding
- FICA (Social Security and Medicare)
- FUTA
Withholding and tax deposits follow the employer’s standard schedule (monthly or semiweekly). Employers who choose to cover the taxes must gross up the taxable amount.
Nonreportable (nontaxable) fringe benefits
Certain noncash benefits are excludable and do not require withholding or reporting if they meet IRC §132 conditions.
Examples include:
- De minimis benefits
- No-additional-cost services
- Qualified employee discounts
- On-premises athletic facilities
These items must be reported by December 31 if taxable, but some can be delayed under the IRS’s special accounting rule (e.g., personal use of vehicles in November and December).
Awards and prizes
Most awards and prizes are taxable when issued, but limited exceptions apply under the qualified award rules.
Exclusion requirements
To be excluded, awards must:
- Be tangible personal property (no cash or gift cards)
- Be part of a qualified plan that doesn’t discriminate in favor of highly compensated employees
- Be given for length of service or safety achievement, and
- Follow presentation guidelines (e.g., recognition ceremony)
Limits:
- Up to $400 per employee per year for nonqualified plans
- Up to $1,600 per employee per year for qualified plans
Amounts above the limit are 100% taxable.
Personal use of company vehicles
When a company-owned or leased vehicle is used for personal reasons, the value of that use must be included in taxable wages.
Reporting and timing
- Reported by December 31 of the year provided
- Taxed for FICA and FUTA
- FIT withholding is optional (but must notify the employee by January 31)
If business use is not documented (e.g., mileage logs), the entire usage is treated as personal.
Exceptions
- De minimis use (short personal errands)
- Qualified nonpersonal use vehicles (e.g., school buses, police cars)
- Automobile demonstrators (with restrictions)
Valuation methods
Employers may use one of the following methods to determine the value of personal vehicle use:
General valuation method
FMV is based on the lease cost in the employee’s geographical area.
Special valuation methods
Employers can apply one of three safe harbor methods:
- Commuting rule
- $1.50 per one-way commute per employee
- Must meet business-use and written-policy requirements
- Annual lease value (ALV) method
- Multiply ALV by % of personal miles
- Add fuel (5.5¢ per personal mile) if provided
- Cents-per-mile method
- Multiply IRS rate by personal miles
- 2022 rate: 58.5¢ per mile
- Vehicle must meet use and mileage thresholds
Each method has consistency requirements and limitations. See IRS Publication 15-B for full criteria.
Appendix A: IRS Annual Lease Value Table (Excerpt)
FMV Range | ALV |
$0–$999 | $600 |
$15,000–15,999 | $4,350 |
$32,000–33,999 | $8,750 |
$50,000–51,999 | $13,250 |
$56,000–57,999 | $14,750 |
> $59,999 | FMV × 25% + $500 |
Refer to IRS Publication 15-B Table 3-1 for full lease value amounts.
Last updated on June 6, 2025