A fringe benefit is a type of compensation that employers may provide to employees (including certain independent contractors). Generally, a fringe benefit is taxable unless it is otherwise excluded from taxable income. IRS Publications 15-B and 5137 both address the IRS' approach to fringe benefits. For additional information regarding specific benefits programs at the University of Washington, visit the University of Washington Benefits page.
A fringe benefit is generally provided "in kind," meaning that they are typically paid in a medium other than cash. Under nearly all circumstances, a payment in cash will be taxable wages to the employee. Fringe benefits may include the use of automobiles or cellphones, tickets, moving expenses, or a variety of other benefits. The taxability of a fringe benefit will depend on whether it falls within an exception and meets the requirements for excludability.
An employer must include all taxable fringe benefits in an employee's gross income, as they are subject to federal, Medicare, and state tax withholding.
Taxable Fringe Benefits:
Cash fringe benefits, such as gift cards or gift certificates, are generally always taxable. Below are some examples of taxable fringe benefits. For additional information, or for clarification regarding whether a fringe benefit is taxable, contact the Tax Office (email@example.com).
- Gift certificates - Value of any gift certificate equivalent to cash awarded to an employee.
- Certain membership - Value of club memberships paid by the UW and related expenditures to the extent that such activities are not documented and substantiated as a bona-fide university business purpose.
- Tickets - Value of season tickets/passes to events for which there is no bona-fide business purpose or the no-additional cost service exclusion (see below under non-taxable fringe benefits) does not apply.
- Spousal travel/meals - Value of university-paid travel and meals for the spouse of a university employee where the spouse's attendance does not serve a documented and substantiated official University business purpose.
- Graduate tuition over $5,250 - Value of university-paid tuition credits taken by an employee enrolled in a graduate degree program, where the total tuition benefit exceeds $5,250 in a calendar year and does not qualify as job-related education. There is an exception. If the courses being taken are required by the University to maintain or improve skills for the graduate student's current job or are required to keep their present salary, status, or job, the graduate tuition waiver would not be taxable. there must be documentation to support this exception.
Non-Taxable Fringe Benefits:
Below are some examples of exclusions and non-taxable fringe benefits. For additional information, or for clarification regarding whether a fringe benefit is taxable, contact the Tax Office (firstname.lastname@example.org).
- De minimis fringes - property or service provided to an employee infrequently and with a value so small that accounting for it is unreasonable and administratively impractical.
- Working condition fringes - property or service provided to an employee to the extent that such expenses would be deductible business expenses if paid for by the employee. Examples are business use of items such as: cell phones, university provided automobiles, airplanes, club memberships, professional dues, publications and meetings. With the exception of university provided cell phones, any personal use of such items is considered taxable income.
- No-additional cost services - services provided for use by an employee if the service is offered primarily for sale to students and third parties and the university incurs no substantial additional cost in providing the service to the employee. An example is providing tickets to events that have not sold out.
- A qualified employee discount - a discount that allows an employee to obtain services or goods from the university at a price below that charged to the general public. Generally, a qualified employee discount cannot exceed 30%. Otherwise, it may be taxable.
- Qualified transportation fringes - pre-tax benefits solutions meant to help an employee's personal transportation needs, such as pre-tax deductions for qualified parking.
- Meals and lodging provided for the convenience of the employer - meals and/or housing provided to an employee may be non-taxable under certain circumstances. To qualify as non-taxable, the benefits must be in-kind (not cash allowances), provided for the university's convenience and be on the university's business premises. University-provided housing must also be required as a condition of employment. Any meals provided with excludable
- Tuition assistance - certain tuition payments may be excludable as working condition fringes (where courses are job related, but do not qualify the employee for a new trade or business) or educational assistance programs.
Departments may make payments for employees to take courses (including professional/continuing development courses, as well as participation in more formal academic courses or degree programs) at other institutions. If these courses are not otherwise treated as a non-taxable fringe benefit under the rules specified above in "Non-Taxable Fringe Benefits," they may be non-taxable as a qualified business expense for education. If an expense is qualified, it is not taxable to the employee, if the expense is non-qualified, it is a taxable fringe benefit and must be reported to Payroll tax accounting (email@example.com) to ensure appropriate withholding.
To be qualified, an expense must:
- Maintain or improve skills required by the individual in the individual's employment (or be required by the employer or law/regulation);
- Must not be a minimum educational requirement for the employee's position; and
- Must not qualify the individual for a new trade or business
Education must meet all three requirements to be considered qualified.. Each criteria is evaluated separately. Below is guidance for completing the required analysis. If, after reading the below, the department still has questions, contact the Tax Office at firstname.lastname@example.org.
- Maintain or improve skills required by the individual in the individual's employment
- This criteria merely requires that the educational activity be relevant to the employee's job duties, and improve or maintain the skills relevant to his/her job.
- In general, all education paid for by a UW department for one of its employees should meet this criteria
- Minimum educational requirement
- A minimum educational requirement is the minimum level of education required for an employee to meet the requirements to be qualified for the employee's position. It must be determined from a consideration of such factors as the requirements of the employer, the applicable law and regulations, and the standards of the profession, trade, or business involved
- Minimum educational requirements include a Certified Professional Accountant (CPA) certification to be a public accountant; or a Doctor of Philosophy (PhD) to be a professor
- Qualification for a new trade or business
- Whether education qualifies an employee for a new trade or business requires analysis based on all the facts and circumstances, including the employee's current job duties and the type of education pursued;
- Some degrees (such as a PhD, Medical Doctor (MD) Juris Doctor (JD),) automatically qualify an employee for a new trade or business because the degree is required to be a member of a particular profession (tenured professors, doctors, and lawyers, respectively)
- It is irrelevant whether the employee plans to, or does in fact, become a member of that new profession. The degree qualifies the employee to do so, without regard to whether the employee does, in fact
- Other degrees (such as a Bachelor's Degree (BS/BA), Master of Business Administration (MBA), Master of Public Health (MPH), etc) may qualify an employee for a new trade or business, depending upon his//her current job duties and level of experience. Whether the degree qualifies the employee for a new trade or business is a factual inquiry into whether the employee qualifies for additional positions based upon the degree earned;
- In most cases, this will mean evaluating the individual's current job duties against the duties of a job for which s/he would be qualified with the new degree. If the employee's current job duties would support a change in employment to the type of position which s/he would be qualified for with the new degree, s/he has not qualified for a new trade or business. If the employee's current job duties would not qualify him/her for the type of position for which s/he would be qualified for with the new degree, s/he has qualified for a new trade or business.
- Note: qualification for a new trade or business does not include specialization within a particular field. A n experienced tax attorney who obtains an LLM in Tax is not qualified for a new trade or business, while a new attorney likely would be
- Note: advantage in hiring is not qualification for a new trade or business-the fact that an MBA might help someone get hired does not mean that they have qualified for a new trade or business if they would be otherwise qualified for the position. For example, a finance manager with 5 years experience and 2 years supervising employees who obtains an MBA likely has not qualified for a new trade or business (management) while a first year fiscal specialist who obtains an MBA likely has qualified for a new trade or business
- In general:
- Continuing and professional education development courses and seminars do not qualify employees for a new trade or business and are treated as non-taxable fringe benefits if within the same field as the employee's job;
- Professional endorsements and/or certifications generally do not qualify employees for a new trade or business, unless the certification is a minimum educational requirement for a particular field (such as a CPA or Certified Financial Analyst (CFA) certification);
- Note: Payment for obtaining professional certifications which are a minimum educational requirement in the employee's field for the first time are taxable fringe benefits. However, payment for professional education to maintain such licensure (such as Continuing Medical Education (CME) courses) and license renewals are not considered taxable fringe benefits.
- Academic degrees may qualify an individual for a new trade or business, depending on the individual's current job responsibilities and the particular academic degree in question