Although some companies that sent workers home during the pandemic have returned them to the office, many businesses continue to rely on remote workers. At the same time, companies in a range of industries are struggling to find and keep employees.
This unusual business environment has spawned some innovative fringe benefits — or expanded traditional offerings — from counseling to pizza deliveries to birthday gifts. What are the tax consequences of offering them? It depends.
"Fringe benefit" typically is used to describe services, property or some other item of value an employer provides its employees. Normally, a fringe benefit constitutes taxable income to the recipient unless a statutory exclusion applies. For some employees, the special tax-exempt perks are the real fringe benefits.
The list of statutory exclusions in the tax code includes common benefits, such as health insurance and retirement plan matching contributions. But other less-known benefits may fit your company's current needs. Here are eight to consider — and their potential tax treatment:
Mental health services: There's no denying that the pandemic has placed new stresses on employees. You may want to offer workers who feel they need it psychological counseling services, including online tele-counseling to those working from home. As medical care, counseling generally doesn't represent taxable income to recipients of the services.
Home office items: When your employees started working from home, they may have needed to buy furniture, such as a desk and chair, and other items. If you pay these costs directly or by reimbursing workers, they qualify as working condition fringe benefits and are exempt from tax so long as they:
- Relate to your company's business,
- Are deductible business expenses, and
- Can be properly substantiated.
Other special rules may come into play. For example, if you pay for Internet services, only the amount attributable to business use qualifies for favorable tax treatment.
Tutoring: Employees with children who can't attend all of their classes in person might appreciate the offer of private tutoring services. Unfortunately, although the tax law approves certain qualified education benefits for employees, it doesn't include education benefits for dependents in grades K-12. Similarly, employees can't claim a tax exclusion for tutoring under a dependent care plan.
Gym memberships: Are your at-home employees reluctant or unable to return to their regular gym? Some employers provide workout facilities or personal trainer services. However, the tax treatment varies. There's a statutory exclusion for employer-provided gyms, but it only applies to onsite facilities. If your company pays for gym memberships or trainers for remote workers, the benefit (the cost to your business) is subject to tax — even if employees use the services online.
Birthday and other gifts: To boost morale, you may want to give employees presents, such as gift cards to commemorate birthdays and anniversaries. Generally, these gifts aren't taxable as long as they qualify as "de minimis" benefits. The IRS hasn't set a specific dollar threshold for the exclusion, but gifts of $50 or less are probably reasonable, barring any unusual circumstances.
Paid subscriptions: For an unusual fringe benefit, consider offering employees subscriptions to viewing and listening services such as Netflix and Spotify. Or personalize subscriptions, for example award BarkBox — a monthly shipment of dog toys and treats — to dog owners.
It's not always clear whether such services qualify as de minimis benefits. In general, subscriptions that last for a year or longer and cost more than $100 are likely to be considered taxable compensation by the IRS. But you should keep detailed records and account for costs and discuss the issue with your CPA.
Corporate discounts: Many employers arrange for employee discounts at retail stores, hotels, car rental agencies, theme parks and movie theaters. Typically, employers foot the bill for the discounts. However, your cost per employee is likely to be relatively low. Due to the nature of the discounts, they generally count as di minimis fringe benefits.
Meals and snacks: One of the more fun benefits some employers started providing at-home employees during the pandemic was pizza and other food delivery and "care packages" with snacks. The tax treatment of such benefits can be tricky. If you send goodies to employees only occasionally and they're relatively inexpensive, they might be treated as di minimis fringe benefits. But regular delivery or expensive meals are generally classified as taxable compensation.
If your company has unfilled positions or is experiencing worker turnover, you might want to sweeten the pot by offering unusual fringe benefits. New benefits can also help motivate employees working from home who feel cut off from the office. But before you make major changes to your benefits menu, consult us on the potential tax consequences.