Understanding the Tax Implications of Fringe Benefits

Even in today’s economy, most job hunters recognize that employment offers more than just salary. Fringe benefits — especially tax-free ones — are important considerations in comparing any compensation package. According to the Society of Louisiana CPAs (LCPA), it’s important to understand the benefits and the tax status of the benefits provided by the employer. Here is an overview of some of the more common fringe benefits and their tax treatment.

Health Benefits — “For many people, health insurance is the most important employee benefit,” acknowledges Raymond P. Ladouceur, JD, CPA, LCPA president. “The premium costs that your employer pays for medical, dental, and vision coverage for you and your family is not generally considered taxable income. In addition, any portion of the healthcare insurance premium that you pay might be taken from pre-tax dollars. If you anticipate paying healthcare costs that your health insurance does not reimburse, ask if a healthcare flexible spending account plan is available. This type of plan should allow you to pay for those expenses with pre-tax dollars.”

Retirement Plans — Another significant benefit offered by many companies are 401(k) or other qualified deferred compensation plans. With such plans, you elect to have a portion of your compensation deducted from your paycheck before taxes and deposited in a retirement savings plan. Your taxable income is lowered and your contributions grow tax-deferred until you begin to take distributions from the account. If your employer offers matching contributions, it will boost your savings even more.

Group Term Life Insurance — An employee can generally exclude from income employer payments of premiums on a policy of up to $50,000 of qualified group term life insurance. Coverage above that amount may result in your taxable compensation increasing a few dollars to account for the extra premium “cost” as determined from an IRS table based on the age of the covered employee. However, the tax you pay is usually much less than what premiums you would pay privately for such an insurance policy.

Disability Insurance — Employer-paid premiums for disability insurance are not taxable to the employee. However, when the employer pays the premium, the disability payments received by the employee are generally taxable. On the other hand, if the policy’s premiums are paid by the employee (on an after-tax basis), any disability payments received are not taxable.

Child Care Expenses — If your prospective employer offers childcare, you may reap a tax benefit. Childcare expenses paid by your employer under a non-discriminatory plan are tax-free up to $5,000 a year. This is true whether the money goes to a qualified care provider you select or covers the cost of care at an employer-provided facility. If your employer doesn’t provide this tax-free benefit, you may be able to get some tax relief through a flexible spending account.

Employee Discounts — Employee discounts are tax-free if the discounts are on products or services generally sold in the business for which the employee works. For merchandise, the discount exclusion is limited to the product’s gross profit percentage. For example, if a company sells an item for $75 and its cost is $50, its gross profit margin is $25. Thus, an employee’s tax-free discount could not exceed $25. For services, the exclusion is limited to 20 percent of the value of the service.

Frequent Flyer Miles — Flying frequently for business may enable you to obtain another tax free benefit: the value of frequent flyer miles accumulated as a result of business travel. Currently, the IRS generally does not treat the use of frequent flyer miles as taxable. CPAs point out that the total value of all taxable fringe benefits received by an employee must be included in wages reported on the W-2. If you have any questions about the tax status of your benefits, consult with a CPA.

To find a CPA who can help you with your personal and financial matters, visit the LCPA’s Web site (www.lcpa.org) and take advantage of the CPA Locator Service. It’s free, fast and easy to use.

Copyright © 2003 Society of Louisiana Certified Public Accountants