Which Fringe Benefits for Executives Are Taxable?

Businesswoman on phone in conference room with colleagues
Photo:

The Balance / Getty Images

Employee benefits or fringe benefits are benefits offered by a company to supplement an employee's salary. Fringe benefits include company phones, vehicles, educational assistance, and employer-sponsored health insurance. Employers are able to deduct the cost of these benefits as qualified business expenses.

There are also special rules set by the IRS when certain benefits aren't offered to all employees, such as when special perks are awarded to high-ranking executives.

Below we'll provide a list of common non-cash fringe benefits and IRS rules on whether or not cost of those benefits is taxable to the employee as income.

Key Takeaways

  • The IRS allows employers to deduct the cost of most employer benefits (in addition to their salary) as qualified business expenses, whether or not the benefit is taxable to employees.
  • There are limits to how much an employer may deduct for most fringe benefits.
  • Common examples of fringe benefits that can be deducted include health insurance, adoption assistance, tuition assistance, group-term life insurance, commuter benefits, and more.

Adoption Assistance

Many companies offer adoption assistance as an added benefit to their employees. These benefits aren't taxable to most employees, but they are taxable as income to S-corporation employees who are 2% shareholders or if adoption assistance is only offered to certain highly compensated employees.

Note

According to a 2019 survey by the Society for Human Resource Management (SHRM), 10% of employers offered adoption assistance of some kind.

Boxes at a Sporting Venue

If a company purchases or leases a skybox or luxury box at a sporting venue to entertain clients or employees, the company can deduct no more than the price of the same number of regular seats at that venue. Other associated expenses (catering, for example), must be "ordinary and necessary" to the business to be deductible as entertainment expenses. A box purchased or leased for the benefit of a specific executive may be taxable income.

Awards/Bonuses

Awards or bonuses are considered compensation. Be careful about providing non-cash payments "on behalf of" executives. If these payments appear to be personal they are not deductible to the company and they are taxable to the executive.

Club Memberships or Club Dues

Club memberships or club dues of all kinds are not deductible unless they have a specific business purpose (a trade group, for example). This includes social, athletic, sporting, luncheon, airline, and hotel clubs. The purpose of the club ("business-related") not the name is controlling. If the cost is deductible, it is taxable income to the executive.

Company Credit Cards

Many companies allow employees to use credit cards to buy items for the company. Some companies issue credit cards to executives and pay the bills without requiring the executive to show business purpose. Personal expenses paid through these credit cards to executives are considered taxable fringe benefits and they cannot be deducted as business expenses.

Executive Dining Room

Meals furnished on employer premises and for the convenience of the employer may be excluded from the income of the executive if the cost meets the "de minimis fringe" test to be excluded from employee income.

Loans to Executives

The IRS will assume that a loan to an executive is really compensation unless it can be shown that the loan is bona fide. Factors showing a loan is bona fide are (1) the existence of a promissory note, (2) cash payments on a specified schedule, (3) interest charges, and (4) security. The loan should be listed as a receivable on the company books, and the interest rate should be at market rate. Personal loans to officers and directors of public companies are banned by the Sarbanes-Oxley Act of 2002.

Employee Discounts

Discounts on property or services provided to customers must be provided to all employees on a non-discriminatory basis. The IRS does not allow the deduction of company discounts only provided to directors and independent contractors. It is not clear from this IRS article whether these discounts are taxable to employees or if the value of these discounts is a deductible business expense to employers.

Spouse/Dependent Life Insurance

The value of spouse or dependent life insurance must be included in the income of the executive.

Transportation/Car for Use of Employee

If an employer provides a car or other vehicle for an executive's use, the amount may be excluded from income up to the amount that would be allowable as a deductible business expense if the executive paid for its use. The executive's personal use of the vehicle is taxable.

Employer-Paid Parking

Parking and transit passes are not taxable to the employee if specific monthly limits are not exceeded. For 2022, the monthly exclusion for qualified parking is $280 and the monthly exclusion for commuter highway vehicle transportation and transit passes is $280.

Employee Use of Listed Property

Listed property are company equipment such as laptop computers and cell phones. If you provide a laptop for an executive, keep detailed records to establish the business use of computers that can be taken home or are kept at home by the executives. There are no recordkeeping exceptions like "no personal use" available for computers.

Cell phones and car phones provided for executives may also be excluded from an executive's income if detailed records are kept showing documentation of business usage for purchase and operation.

Vacations

If you pay for a vacation for an executive (hotels, airfare, and other expenses), the value of the vacation is considered personal must be included in the executive's gross income. The value is also not deductible to the employer as a business expense.

Spouse/Dependent/Other Individual Travel With an Executive

Payments for a spouse, dependent, or other individuals to travel with an executive are not deductible business expenses unless (a) the individual is an employee, (b) the travel of the individual is for bona fide business purposes, and (c) the expenses would otherwise be deductible by the individual. To justify these exceptions, keep good records on the purpose of the trip and the amount of time spent by this individual on business purposes.

Qualified Retirement Planning Services

If you have a qualified retirement plan, you may provide employees with retirement planning services; these services are not considered as income for the employees. Your company may not discriminate in favor of highly compensated executives in providing these services.

Frequently Asked Questions (FAQs)

Are fringe benefits taxable?

According to the IRS, any fringe benefit provided by an employer is taxable and must be included in the recipient's pay unless the law specifically excludes it. Many common benefits such as health and life insurance, commuter benefits, and adoption assistance are forbidden from being taxable as income, up to certain limits.

Are employer-paid health insurance premiums taxable?

No, health insurance premiums paid for by an employer are exempt from federal income and payroll taxes. What's more, many employees can deduct the cost of the health insurance premiums they pay from their taxable income.

Was this page helpful?
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Publication 15-B (2022), Employer's Tax Guide to Fringe Benefit."

  2. SHRM. "Managing Adoption Assistance Benefits."

  3. U.S. Congress. "H.R.3763 - Sarbanes-Oxley Act of 2002."

  4. Tax Policy Center. "Key Elements of the U.S. Tax System."

Related Articles