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Taxable and Nontaxable Employee Benefits

As the unemployment rate falls from its 2020 high, employees are switching jobs in record numbers. The new stability in the economy means workers have more leeway to shop around for jobs that fit their lifestyles, needs, and values.

Now, the onus is on employers to provide an environment that makes their key team members want to stay and also attracts new talent. Part of that equation is providing a great benefits package. But if you’re one of the many employers expanding their benefits, how do you pay taxes on your new programs?

In general, the employer must pay various employment taxes on an employee’s wages, salary, or commissions. The same is true of bonuses and fringe benefits. There is an exception to that rule for certain tax-qualified fringe benefits provided by the employer. These qualified benefits are exempt from both Social Security and Medicare taxes, subject to certain dollar limitations.

 

Nontaxable benefits

  • Health benefits
  • Accident and disability insurance (and the employee is the beneficiary)
  • Employer contributions to qualified retirement plans
  • Employer-provided cellphones
  • Educational assistance
  • Adoption assistance
  • Dependent care assistance
  • Up to $50,000 group term life insurance per employee
  • Transportation (commuting) benefits
  • Parking expense assistance
  • Health savings accounts
  • Achievement awards
  • Employee discounts on the goods or services the employer sells.

 

The rules around the deductibility of these benefits and others can be complex and often vary based on the specific circumstances. Noncompliance with these rules can mean the benefit is taxable to the employee.

 

Taxable benefits

Offering taxable benefits to employees can still be beneficial, provided employees pay less in tax on a benefit than they would pay for the service if they purchased it out of pocket. Taxable benefits must be included as income on the employee’s W-2.

 

Examples of taxable employee benefits include:

  • Education assistance over the $5,250 annual limit for non-job-related education.
  • Use of a company car for personal reasons.
  • Athletic club memberships
  • Moving expenses

 

Employer considerations

Employers should keep in mind that tax standing is not an issue for some benefits they may offer. For example, offering a remote, flexible, or hybrid work arrangement does not have tax consequences. Benefits such as these are valuable to employees and can help attract new talent.

This is just a summary of complex provisions. Consult with our team on any benefits to make sure they’re following the rules, and keep an eye out for changes.