Non-Cash Benefits: Definition, Tax Code & Examples

Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

Many employers provide benefits to attract and retain employees, as well as to make it easier for employees to do their jobs. In this lesson, we'll look at non-cash benefits and their tax implications.

Compensation

Clara owns a company. She's decided that she wants to help her employees be healthier. As a result, she's decided to offer lots of extra benefits for them: quality health insurance, a free gym membership at a nationwide chain for any employees and family members of employees, free healthy snacks in the office, and gift cards to a local farmer's market.

Clara is offering her employees additional compensation, which is what people receive for doing work. Often, people think of just their salary or their hourly wage when speaking of compensation, but there are many other benefits that can come along with the money we receive. These benefits, too, are part of an employee's compensation.

Unfortunately, some benefits also come with tax liabilities. To help Clara understand any additional tax liabilities her healthy employee initiative might create, let's look closer at non-cash benefits and the tax code implications.

Fringe Benefits

Clara pays her employees a fair wage, but she also wants to provide them with extra benefits. That type of non-cash compensation given to employees is often called fringe benefits. Clara's healthy employee initiative includes many fringe benefits.

Fringe benefits are designed to help attract and retain employees, as well as to make doing their job easier. The fringe benefits Clara has decided to offer her employees include insurance, gym membership, healthy snacks, and gift cards. But there are other examples of fringe benefits, too. Some companies offer a company vehicle and/or electronics like a computer or tablet to make doing a job easier. Others use incentives like gifts, gift cards, or tickets to events to encourage employees. Others might include parking permits, reduced-cost public transit passes, or even tuition waivers.

Tax Code

Clara understands that the healthy employee initiative she's offering includes some fringe benefits for her employees. This is a good thing! It incentivizes employees to become healthier, which can lead to fewer sick days and a more productive workforce. Not to mention that good health can make Clara's employees happier.

But Clara is worried about the tax implications of offering these benefits. Tax codes vary from state to state and can change year by year, but as of the 2019 tax year, the United States federal government requires that the fair market value of fringe benefits be included in the gross income of the person receiving the benefits. This fair market value, then, should be reflected on the W-2 forms for Clara's employees or the 1099 forms for any contractors that work for Clara.

In addition to including the fair market value in the employees' gross income on tax reporting documents, Clara's company will also be responsible for withholding taxes on the fair market amount of the fringe benefits.

There are exceptions to the reporting and withholding requirements, including exceptions for most insurance and some exceptions for things like adoption assistance programs, on-site gyms, employee discounts, stock options, and a few other benefits.

To help Clara understand the tax implications of her fringe benefit program, let's look at an example. One of Clara's employees is Samina. Samina makes $65,000 per year plus the benefits that Clara provides. Samina takes advantage of all of the health benefits available to her, and her wife Laurie also takes advantage of the free gym membership and health insurance.

In Samina's case, she's utilizing health insurance, a free gym membership, snacks at the office, and gift cards to the farmer's market. If Clara were to add in the fair market value of all of those things over the course of the year, it would be around $12,000 extra, bringing Samina's gross income on her W-2 to $77,000 per year.

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