A fringe benefit is a form of payment for the performance of services. For example, you provide an employee with a fringe benefit when you allow them to use a business vehicle to commute to and from work.
Fringe benefits are generally included in an employee’s gross income. The benefits are subject to income tax withholding and employment taxes. Fringe benefits include cars and flights on aircraft that the employer provides, free or discounted commercial flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events.
According to the rules of the Internal Revenue Service (IRS), several fringe benefits are free of tax rates. An example of fringe benefits excluded from taxes are de minimis meals and certain transportation benefits.
In this article, we will highlight these two relevant examples, but you can find all tax-free fringe benefits and more information in Publication 15-B of the Department of the Treasury for 2022.
De minimis meals
Any occasional meals that an employer provides and that are so inexpensive (taking into account how frequently you provide meals to your employees) that to account for them would be unreasonable or administratively impracticable, are considered “de minimis” benefits and are, thus, tax-free.
Examples of de minimis meals are:
- Coffee, doughnuts, or soft drinks;
- Occasional meal expenses are provided to an employee working overtime. However, the exclusion doesn’t apply to meal expenses based on the hours worked (for example, $2.00 per hour for each hour over 8 hours), or meals provided on a regular or routine basis. In such cases, these are taxable income for the employee;
- Occasional parties or picnics for employees and their guests
Transportation (commuting) benefits
Transportation benefits are benefits provided to employees for their transportation such as commuting to and from work. There are exclusion rules for two types of transportation benefits: de minimis transportation benefits and qualified transportation benefits.
De minimis transportation benefits
Any local transportation that an employer provides to an employee that has such a low value (taking into account how frequently you provide transportation to your employees) that accounting for it would be unreasonable or administratively impracticable, is considered “de minimis” benefits and are thus tax-free.
For instance, it applies to occasional local transportation fare you give an employee because the employee is working overtime if the benefit is reasonable and isn’t based on hours worked. Local transportation fare provided on a regular or routine basis doesn’t qualify for this exclusion.
A special rule allows you to exclude as “de minimis” benefit public transit passes, tokens, or fare cards you provide at a discount to defray your employee’s commuting costs on the public transit system if the discount doesn’t exceed $21 in any month. Similarly, you may also provide a voucher or similar instrument that is exchangeable solely for tokens, fare cards, or other instruments that enable your employee to use the public transit system if the value of the vouchers and other instruments in any month doesn’t exceed $21. You may also reimburse your employee to cover the cost of commuting on a public transit system, provided your employee doesn’t receive more than $21 in reimbursements for commuting costs in any month. The reimbursement must be made under a bona fide reimbursement arrangement, where you establish appropriate procedures for verifying periodically that your employee’s use of public transportation for commuting is consistent with the value of the benefit provided. The exclusion doesn’t apply to the provision of any benefit to defray public transit expenses incurred for personal travel other than commuting.
Qualified transportation benefits
You can generally exclude the value of transportation benefits that you provide to an employee during 2022 from the employee’s wages up to the following limits:
- $280 per month for combined commuter highway vehicle transportation and transit passes
- $280 per month for qualified parking
If the value of a benefit for any month is more than its limit, include in the employee’s wages the amount over the limit minus any amount the employee paid for the benefit. You cannot exclude the excess from the employee’s wages as a de minimis transportation benefit.
An employer can exclude the following benefits as well:
- A ride in a commuter highway vehicle between the employee’s home and workplace: A commuter highway vehicle is any highway vehicle that seats at least 6 adults (not including the driver). In addition, you must reasonably expect that at least 80% of the vehicle mileage will be for transporting employees between their homes and work with employees occupying at least one-half the vehicle’s seats (not including the driver’s);
- A transit pass: A transit pass is any pass, token, farecard, voucher, or similar item entitling a person to ride, free of charge or at a reduced rate, on one of the following: a) Mass transit, b) In a vehicle that seats at least 6 adults (not including the driver) if a person in the business of transporting persons for pay or hire operates it;
- Qualified parking: Qualified parking is parking you provide to your employees on or near your business premises. It includes parking on or near the location from which your employees commute to work using mass transit, commuter highway vehicles, or carpools. It doesn’t include parking at or near your employee’s home.
You can find more information on transportation (commuting) benefits in Publication 15-B of the Department of the Treasury for 2022 (pages 20-21).