With all the uncertainty surrounding Trump’s tax plan, tax-saving tips for small business owners are as important as ever.
Finding ways to provide tax-exempt fringe benefits to employees can be an effective strategy for business owners interested in minimizing small business taxes.
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This article will detail over a dozen actionable tax-exempt fringe benefits you can use to add value for employees without increasing your tax burden.
What Are Fringe Benefits?
Fringe benefits are items or services that an employer provides to an employee for mutual benefits, such as increasing productivity and efficiency.
They can be considered taxable or nontaxable compensation to employees themselves, but in either case, these fringe benefits are always a tax-deductible business expense for employers.
Nontaxable fringe benefits have these added perks:
- The employee does not have to pay federal income tax, Social Security tax, or Medicare tax on their value, and
- The employer does not have to pay federal unemployment tax (FUTA),the employer-matching portion of Social Security, or Medicare tax that it would otherwise have to pay.
Tax-Exempt Fringe Benefits for Small Businesses
Though the IRS lists some exclusions in section 2 of the Employer’s Tax Guide to Fringe Benefits (Publication 15-B) it is not required that businesses include the value of the following fringe benefits in an employee’s pay:
1. Accident & Health Benefits
Businesses may make tax-free contributions to the cost of employees’ accident, health, and qualified long-term care insurance.
Payments or reimbursements for employees’ medical expenses are tax-exempt, too.
2. Employee Achievement Awards
Businesses can reward their employees with tangible personal property valued up to $1,600* for length of service or safety achievements.
The value of those awards— unlike cash, gift certificates, or stock— is tax-exempt for employees!
3. Athletic Facilities Owned, Operated, or Leased by the Employer
A free gym for employees, their spouses, and their dependent children younger than 25 on company-owned premises offers convenience and cost savings to encourage a healthy lifestyle.
Healthy employees may miss fewer days of work, be more productive, and save your business money on long-term health benefits.
4. De Minimis Benefits
Low-value, infrequently provided benefits aren’t taxable (as long as they aren’t cash or cash equivalents.)
Giving an employee tickets to see her favorite sports team or a cake from her favorite bakery shows you care without creating tax liability for either of you.
5. Employee Stock Options
You can give your employees incentive stock options, employee stock purchase plan options, and non-statutory (nonqualified) stock options without having to pay taxes on them when the employee exercises or sells the stock.
However, there are tax reporting requirements for stock options that don’t apply to other fringe benefits.
6. Group Term Life Insurance Coverage
You can give your employees term life insurance with a death benefit up to $50,000 and the premiums you pay will be tax exempt.
Sometimes, even life insurance for an employee’s spouse is tax exempt too.
7. Reimbursing Moving Expenses for New Hires
Sometimes, the perfect candidate for a new hire lives outside of the area.
Even if he’s a perfect fit, the costs of uprooting his life and relocating all his personal possessions will weigh heavily in his decision to join your team.
But don’t despair– if an employee’s new principal workplace is at least 50 miles from their old home and the employee works at least 39 weeks during the first 12 months after the move, your business can offer tax exempt moving reimbursements as an added incentive.
8. Retirement Planning Services
If your small business offers employees a pension or a qualified retirement plan such as a 401(k), you can supply services that give general retirement information and advice to employees.
However, you may have to pay taxes on other services like tax preparation, accounting, legal, or brokerage services.
9. Commuting Benefits
Transportation benefits are exempt up to $255 per month when provided for using a commuter highway vehicle (such as a vanpool), a transit pass, or qualified parking.
Bicycle commuting reimbursements up to $20 are also tax exempt, as long as the employee doesn’t receive another commuting benefit in the same month.
10. Dependent Care Assistance
Employees can exclude from gross income up to $5,000** in annual benefits received under a dependent care assistance program that makes it possible for them to work.
11. Educational Assistance
Help your employees earn a degree or complete continuing education that will enhance their professional growth.
Use your business to contribute up to $5,250 per year towards textbooks, tuition, equipment, and fees for your most promising employees– they’ll appreciate your support of their long-term goals, and neither of you will incur additional tax liability.
12. Employee Discounts
Make your small business an attractive place to work by giving employees discounts on the same products or services you provide to customers.
In some cases, spouses and dependent children are eligible for such discounts as well.
13. Employer-Provided Cellphones
Some businesses provide employees with a company phone to be used for business purposes.
This benefit is not taxable even if the phone is also for personal use (as long as its primary purpose is business use.)
14. High Deductible Health Plan & Health Savings Account (HSA)
At first glance, it would not appear that this business tax strategy benefits the employee.
However, when executed properly, enrolling employees in an HDHP coupled with an HSA plan can be a very powerful tool for long-term cost savings for everyone in your organization.
15. Company- Sponsored Lodging
In some industries, like construction, it may be normal for your business to provide temporary housing or lodging for employees.
This expense is not taxable as long as lodging is conveniently provided on the premises and is required as a condition of employment.
16. Free Meals
Meals can be considered tax-free fringe benefits as long as they fall under the category ‘de minimis’ or are furnished at work for the employer’s convenience.
17. No-Additional-Cost Services
This perk doesn’t cost the company anything, usually because it’s rolled into other costs of doing business.
For example, an airline might allow its employees to fly for free on flights that aren’t fully booked.
18. For Educational Institutions: Tuition Reduction
If your business is a school or some other qualified educational institution, you can afford employees reduced tuition for undergraduate education or for graduate education if the employee performs teaching or research activities.
19. Working Condition Benefits
Sometimes, your business will need to supplement property or services in order for an employee to perform his or her job.
Property or services an employer provides, such as a company car used for business purposes, are tax exemptions for both parties.
Which Fringe Benefits Are Taxable?
With all this talk about nontaxable fringe benefits for small businesses, you might be wondering what is still taxable.
Rest assured: Most fringe benefits are taxable, unless they qualify for specific exclusions like those above.
Examples of common taxable fringe benefits include cash awards, expense reimbursements that employees don’t document adequately, and personal use of a company car.
Other taxable fringe benefits include bonuses, athletic club memberships, and the value of premiums for group term life insurance with death benefits in excess of $50,000.
Where Should You Report Fringe Benefits?
Business owners (or those filing taxes on behalf of the business) must report a taxable fringe benefit’s fair market value on the employee’s annual W-2 federal income tax reporting statement.
The Bottom Line
Fringe benefits are an excellent way for small businesses to increase employee satisfaction and retention while minimizing tax costs.
Each of these fringe benefits has important distinctions and exceptions so be sure to read IRS Publication 15-B thoroughly.
DISCLAIMER: While this guide offers a general overview to help small business owners identify potential tax savings, we strongly suggest that you consult with a qualified tax professional to avoid making mistakes on your tax returns.
*Achievement awards are tax-exempt up to $1,600 for qualified plan awards (or up to $400 for non-qualified plan awards).
**The maximum value here is only $2,500 if married filing separately.