Corporate HR departments love nontraditional benefits—perks other than leave, health insurance and retirement benefits—because they’re generally cheap and build loads of employee good will. However, many so-called lifestyle benefits are taxable, much to HR’s chagrin.
Employers that use their corporate buying power to provide employees with discounts on pet insurance, auto insurance, special shopping events at department stores, coupons, etc., generally don’t have payroll tax problems, since employees pay with after-tax dollars. Wrinkle: The more creative the benefit, the more likely it is that payroll taxes will be due. Consider the following.
• Cash rewards. Cash trumps coupons or discounts every time. But cash is always taxable, because it has value. Watch out: Cash can be disguised. An employer-based rewards program that tracks employees’ purchases and gives them cash credits is still cash.
• Gift cards. Gift cards are taxable cash substitutes, because like cash, they have a value. And this includes gift cards given in lieu of a nontaxable benefit (e.g., gift cards to supermarkets instead of the company providing a holiday turkey or ham, which is a de minimis).
• Rebates for buying hybrid/electric cars. The value of any employer rebate is fully taxable. What may not be taxable, according to an IRS Information Letter, is an employee’s use of an employer’s electrical outlet to charge an employee’s electric car. It could be a tax-free de minimis fringe benefit, but the IRS didn’t say for sure. (INFO 2012-0008)
• Free parking/transit passes/bicycles. The tax code allows employees to use pretax dollars to defray part of their commuting expenses, or you may reimburse employees for those expenses. 2012 amounts: $125 a month for mass transit benefits, $240 a month for employer-provided parking and $20 a month for bicycle fringes. Contrast: The entire cost is taxable if you pick up the full cost of employees’ commutes.
• Gym memberships. The full value of gym memberships is taxable to employees, unless the gym is on the employer’s premises, the employer operates the facility or contracts with another to operate it and membership is limited to employees and their families.
• Funeral planning. Employees gain access to a variety of services, ranging from obtaining a planning guide (a probable de minimis fringe) to more elaborate personal assistance. The more complex the services provided, the more likely they are taxable.
• Wellness benefits. Wellness programs that reward employees for achieving a result, instead of just participating in the program, deserve scrutiny. What you’re looking for: Employer-provided cash payments or gift cards to employees who quit smoking or lose weight, for example, are fully taxable. Also fully taxable are magazine subscriptions for individual employees, the cost of nonprescription diet food and subsidies for home exercise equipment.
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