LGT ProfitSense Insights

Fringe Benefits and Gross Income

Written by Aden Pham, CPA, | Oct 9, 2020

As a general rule, gross income includes all compensation and employment benefits unless exclusion is provided by law. Cafeteria plan and certain other fringe benefits are among the items that could be excluded from employees' taxable income. Below are some common fringe benefits excludible from an employee's taxable income if certain conditions are met.

 

Working Condition Fringe Benefits

A working condition fringe benefit is not included in gross income, as provided under Internal Revenue Code (IRC) section 132(a)(3). A product or service provided by an employer to an employee would qualify as working condition fringe benefit if all the following requirements are met:

  1. The cost of property or service, if hypothetically paid by the employee, would have been allowable as a trade or business expense deduction or depreciable asset.
  2. The employee's use of the property or service is substantiated by adequate records.
  3. The employee's use of the property or service is related only to the employer's trade or business, or the employee's trade or business of being an employee of the employer.

De Minimis Fringe Benefits

De minimis fringe benefit provided by an employer to an employee is not included in the employee's gross income. As defined under IRC section 132(e)(1), the term de minimis fringe means any property or service the value of which is (after taking into account the frequency with which the employer provides similar fringes to the employer's employees) so small as to make accounting for it unreasonable or administratively impracticable.

Examples of benefits excludable as de minimis fringe benefits:

  • Occasional personal use of an employer's copying machine provided that the employer exercises sufficient control and imposes significant restrictions on the personal use of the device so that at least 85 percent of the use of the machine is for business purposes
  • Occasional cocktail parties, group meals, or picnics for employees and their guests
  • Traditional birthday or holiday gifts of property (not cash) with a low fair market value
  • Occasional theater or sporting event tickets
  • Coffee, doughnuts, and soft drinks
  • Local telephone calls
  • Flowers, fruit, books, or similar property provided to employees under special circumstances (e.g., on account of illness, outstanding performance, or family crisis).

Examples of benefits not excludable as de minimis fringe benefits (but could be considered under other statutory provisions such as working condition fringes):

  • Season tickets to sporting or theatrical events
  • The commuting use of an employer-provided automobile or other vehicles more than one day a month
  • Membership in a private country club or athletic facility, regardless of the frequency with which the employee uses the facility
  • Employer-provided group-term life insurance on the life of the spouse or child of an employee
  • Use of employer-owned or leased facilities (such as an apartment, hunting lodge, boat, etc.) for a weekend.

Payments under Accountable Plans

Under Reg. 1.62-2(c)(4), amounts treated as paid under an accountable plan are excluded from the employee's gross income, are not reported as wages or other compensation on the employee's Form W-2, and are exempt from the withholding and payment of employment taxes. For a reimbursement or other expense allowance arrangement to qualify as an accountable plan, all the following requirements must be met:

  1. Business connection requirement: Advances, allowances (including per diem allowances, allowances only for meals and incidental expenses, and mileage allowances), or reimbursements must be only for business expenses that are deductible as trade or business expense or depreciable asset. The arrangement must be paid or incurred by an employee in connection with his or her performance of service as an employee.
  2. Substantiation requirement: Each business expense must maintain records of time, place, amount, and business purpose.
  3. Returning amounts in excess of expenses. An employee is required to return any amount in excess of business expense within a reasonable time.

Work Clothes and Uniform

Work clothes/uniform allowance or reimbursement could be excluded from an employee's gross income if it meets accountable plan rules. In addition, work clothes or uniforms must:

  • Be required explicitly as a condition of employment; and
  • Cannot be worn or adaptable to general usage as ordinary clothing.

If the clothing qualifies as excludable, then reimbursements for the cleaning costs are also excludable.

Safety Equipment

Similar to work clothes or uniforms, safety equipment allowances or reimbursement could also be excluded from an employee's gross income if it meets accountable plan rules. However, the equipment doesn't need to be required by the employer. Common examples include hardhat, anti-glare screen for computer, or safety shoes.

 

 

Uncertain of your fringe benefits?

 
We can help.