One of the sure-fire red flags for the IRS and exempt organizations is the presence of taxable fringe benefits. While often deemed necessary, items such as the use of company-owned cars are considered taxable fringe benefits to the IRS. Other examples of fringe benefits include tuition discounts, use of company property (such as an apartment or condo) and life insurance. To help you stay in the clear, here are the IRS’ definitions of fringe benefits and the tax consequences:
Who receives: Any person such as an employee, contract worker or director may be a recipient of fringe benefits if they perform a service for you. In some cases, fringe benefits provided to volunteers may create taxable income for them. An example is when a parent teaches at a school as a volunteer and receives discounted tuition.
Who provides: You, the organization, are the provider of benefit if it connects with you in any way, even if the actual provider is a third party. An example is day-care service.
How to calculate: The value of the fringe benefit must be included in the recipient’s pay unless it is excluded by law. For example, accident and health benefits, commuting benefits, meals and employee discounts are not considered fringe benefits for tax purposes. And the value of the benefit is diminished by any amount which the receiver pays for the benefit. Additionally, reimbursements need to have proper documentation – an original receipt and not a credit card bill.
How to account: For employees, the value of a fringe benefit is included in the Form W-2, for contractors – Form 1099-MISC, and for partners or directors – Schedule K-1 (Form 1065). Failure to include the value of fringe benefits in taxable income creates an excess benefit transaction – an IRS hot button.
Complete information about exemptions, tax treatments and valuations can be found on the IRS Web site.